Managing your Trading Risk

Basically, the best traders know when to get in and when to get out. They usually look for a 3:1 risk/reward ratio. The downside risk must be less than the upside potential. While there are several levels of success on the upside, there is only one level of risk on the downside. There are never multipliers on the downside.

Great traders decide on their exit points on the upside as well as the downside in advance of their trades. They establish an exit point based on the amount of profitability they want from a trade, taking into consideration commission and slippage costs. Then they get out of a trade before it reverses. They realize that when they get bigger and stay longer, they are increasing their risk, especially in highly volatile and illiquid markets. However, at times they also press the bet and add to their positions before the exit target is reached. But they are careful not to get too greedy.

In highly volatile markets, successful traders are particularly cautious in managing their positions. They are quick to adapt to changing circumstances and don’t remain wedded to positions. They are continually moving stocks, mentally and physically, reviewing and renewing their choices. Successful traders get bigger in their winners and kick out their losers. They diversify when they get a chance to do so, recognizing that they lose the most money when they are too loaded up in one area of the market.

They evaluate each position on its own merits and never justify being in one stock by the fact that they are ahead in another stock. They are not always looking to recoup losses or to hit home runs. In fact, they are very clear about closing down their trading for the day once they reach a certain amount of loss.

Next Level Trading