😕Risk Management

Get Real

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It only takes ONE bad trade WITHOUT risk management to wipe out a month of gains. Play the Averages Trading is about statistics and averages.

If you are looking for the one big win to retire on, then you’re gambling, not trading.

For trading, the goal is to play the averages. Maximize your average gain, minimize your average loss, and win more frequently than you lose (>50% win rate).

Establish rules for yourself, and follow them. Be extremely strict with yourself, and allow no variation from the rules until you’re making money and have regained all losses.

Only after you’re out of the newbie hole should you begin risking more because that’s the point at which you’ve established some level of skill and feel for trading.

Never risk more money than you can afford to lose on a bet. If you’re putting rent money into the market, there’s a serious problem, and you’re exposing yourself to significantly more risk than is reasonable. Please reevaluate your priorities and take care of your responsibilities first. Don’t ever go big into a play. Have a set amount of your portfolio, 5-10% or so, for each play. Don’t go beyond the upper bound you set, no matter how good a play looks.

Play the averages! Learn how to set stop losses! A lot of beginners don’t know how to set stop losses and end up losing a ton of money on them, so they stop using stop losses altogether. Not having a stop loss is one of the worst things you can do in risk management because it opens you up to losses that range from 100% to infinity. You must understand the concept of support levels and set your stop loss slightly below the first support level (or slightly above the resistance level if you’re shorting).

Don’t establish your entire position all at once. Gradually buy-in. This is called “dollar cost averaging”. For small accounts, it’s ok to buy your whole position at once if your brokerage charges a commission since the commission will greatly eat into your profits until your coffers are a bit more full. Don’t chase the fish.

With all the scanners, chats, charts, and other resources we have open at any given time, trading can feel like we’re following tracks, hunting big game. Shifting into that mindset can burn you badly because, mentally, you’re ready to chase your prey (profit). Instead, think of trading more like fishing. You’re sitting out on a boat, doing a whole lot of nothing, just waiting for something to tug on your line. You wait for a setup to present itself, and then you eat.

It seems that a lot of people put money into the market that they can’t really afford to lose, hoping to multiply it and get rich. Unfortunately, the fact that they can’t afford to lose that money makes it even harder to multiply it because the emotional aspect is so much more intense. Instead of putting money into the market that you can’t afford, here’s what I recommend you do: every single time you think about eating out, figure out the cost of what you would order and put that money into the market instead, then make a sandwich or something. Go get cheap coffee on the way to work instead of a caramel frappe and put the difference into the market. Live alone? Find a place with roommates and put the difference into the market. Don’t risk what you can’t afford to lose. Instead, minimize luxury expenses so that you can afford to lose more.


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