TheRiskBlog

Investing in the markets is hard work, at least if you want to be profitable in the long run. It does not help to be lucky on your next trade, you need to be “lucky” on your next 100 trades. In order to achieve a goal that lofty you need to make sure that you keep your losses small. Idealy you always hit the exit button just below zero.

In the real world this doesn´t happen to often, sometimes because the trader is emotional, hopes that the stock comes back or just wants to keep the stock for sentimental reasons.

If you want to improve your trading substantially, then make sure that your losses are tamed. For that i have put together the 10 most important steps to do this:

1. Get a plan on what risk management is, what it can do for you and how you can implement it into your trading. Risk management helps you to minimize your losses.
2. Come up with a trading plan, much like you would come up with a business plan for starting a new business. You can use a “mechanical system” or you can use any other form of trade entry, but make sure that you follow a plan.
3. The center of your trading world is your own account, not the chart, your neighbor´s tip, the news or any other kind of outside information that is not based on your account and its movement.
4. Always work with stops in your trading but do not find the stops on a chart, instead derive the stops from your account.
5. Always start small with your position size and scale up when you are winning, then scale down again when you start losing. Do not enter a trade with all you have and scale down when you start winning, this will not work in the long run.
6. Start using more risk (higher position sizes) when your account is in the green, use less risk (but longer time frames) when your account is in the red.
7. Make sure that you trade disciplined, do not act emotional. For the same situation always use the same approach, don´t change it, unless the market around you changes substantially.
8. Don´t improve your hit rate. Improve your risk management, money management and win management processes, trade disciplined and stay within your ability and your hit rate will improve by itself.
9. Don´t use any mean reversion trading system. It will work until the single day when it stops working, only on that day you will be fully engaged in the market and will probably lose a substantial amount of money (also see this article).
10. Never average down unless your account is solid in the green. Averaging down again will work until the day it doesn´t work any longer, only on that day it will be to late for your account (also see this related article).

The most important part is that you keep your losses down. If you can do that you will start winning since market can only go up, down or sideways so your chance of winning will improve over time.