I win and if not i don´t lose much
Very simple idea but this is the heart of risk management. Every trade we make sets out to be a winner, but if we do not win for any reason, we need to make sure, that we don´t lose much. There are several ways to achieve this goal.
1. We can improve our hit rate and only trade stocks we know go up or down. The problem is, that in most cases we do not know exactly whether the stock will go up or down and it is a good amount of guess work. So improving our hit rate is not always the right approach. On the other hand it can be done. If you find a mass market, something that all your friends want, and you research the company behind it, you most probably found a winner. In that case, investing in it should boost your hit rate.
2. Disciplined approach. If you are developing a trading system and it shows gains, then stick to it. Change the risk management the system is using but do not change the system itself. On the other hand change the system, if it doesn´t fit the market any longer. Markets always change so most trading systems have to change to because their entry idea is dependable on the market surroundings. Only if you are developing a system that depends on risk management or money management as its primary entry point do not change the system itself. Instead stick with it and improve on your own discipline to trade that system and on your discipline to stick with your risk management routines. If you do you will gain, if you don´t you will lose.
3. In case you lose money try to improve your risk management procedures. For example if you follow the classic approach of not losing more than 1% of your entire account in every trade but you tend to lose money with every trade and get stopped out (sounds familiar?) chances are you are trading higher volatile stocks. If the volatility of your trade is higher than the 1% you are risking you will lose money. But this doesn´t mean that you should change your system it only dictates you use different stocks instead, less volatile.
4. Always use stops and stick to those stops. You heard this one before but it can not be emphasized enough. Stops keep you out of trouble but stops also need to fit into your trading environment. For example if you trade a $20.000 account but on every trade you use a $5.000 stop obviously your trading account will not last very long. So it is imperative to calculate the correct stop. There are several tools out there that can help you in doing just that. One of our favorites is Tradelogger a package, that is free and helps you to minimze your losses.
Every trade you make has the potential to gain money but if not it is most important that you do not lose a lot of money.