Stock Trading Risk Management
Your process for risk management will set the tone for your trading mindset in each trade. It is the first thing that you should think about when putting on a trade. Period. This is the name of the game: how long can you survive in the market. Without proper risk management, you won’t.
Stock trading is not a gamble. It shouldn’t be all or nothing like Vegas. Instead, it is a game of probabilities. As part of that game, you must understand that risk management is key to your success. Knowing when and where to stop out of your trades, along with how much of your account you will risk, is of utmost importance.
As a rule of thumb, we don’t recommend risking more than 2% of your account on any single trade at a maximum. Realistically, you should keep this to about 0.5% to 1% of your account. Not every trade deserves maximum risk.
However, until you truly learn to accept the risk, you will interpret the noise of the market as a potential threat and will find some way of rationalizing to yourself that you must exit the trade too soon.
However, until you truly learn to accept the risk, you will interpret the noise of the market as a potential threat and will find some way of rationalizing to yourself that you must exit the trade too soon.
To help with your trading risk management strategies, we recommend you watch our SimCast episode with Kris Verma where we discuss the Kelly Criteria. It will help you learn how to set your risk and position size for every trade.
