Why Risk Management is The Key to Making Real Investment Money
Risk Management isn't just a catch phrase or hand waving if you are a trader. In my honest opinion, it's more important than everything else when it comes to successful trading.
Many investment tools and trading strategies make money. Out of the millions of sites on the internet offering trading services, It's not hard to find an investment system that could possibly make money.
But that's in theory.
Most of these sites or products show you potential gains without taking into account how much you are potentially risking and how much you might lose per trade. And let's face it, once you've lost your entire account, how much do those "theoretical" profits really matter?
If you learn anything at all from an investing course, let it be about Risk Management. It's the key ingredient to any investor's success, whether your account is $1K or $1B.
It is hard to find genuine trading rules that make money without risk management. In fact, I am pretty confident you can provide me with any type of entry signal you like, and I can find a way to make money with it. I am confident about this statement because I know risk management in my bones. And once you know how to use risk management, you can almost do anything as a trader and it makes money over time.
It's really that powerful.
And it's not like Risk Management is difficult to understand. Most of Risk Management can be summed up in a single phrase: Don't lose so much money you have to stop investing.
Catastrophic losses are losses that cause you to stop trading. If you lose money repeatedly over a period of time, or you have a single gigantic loss, you'll need to stop trading. You can't make money trading unless you are actually trading. So you need to structure your trading actions around making sure you continue trading.
The main idea of Risk Management applies to:
• The Rules of the investment or trading system
• The actions taken to execute the system
• The portfolio of money and instruments used to fund the system
• The markets used by the rules of the system
• It applies to every part of the investment process.
What to Do Right Now To Trade Smarter
You might be asking - what can I do right now that makes a difference? That's easy. Risk less than 1% of your account on every investment you make until you finish the 20 days to Trend Trading and fully understand risk management.
If you do this, you and your money will be safe. This action alone will make your account much more safe and secure. The way you calculate the 1% of your account is:
1. Figure out how much to risk: Take the total value of your account. Multiply by .01. This is the amount of money to place at risk on a single trade.
2. See how far away your exit point is from your entry point on every trade. Multiply this by the number of contracts or shares of stock you have on in that trade. This will give you a dollar amount of risk.
3. If you have too much risk on in any single trade, reduce the number of contracts or shares you have in that trade until you are risking 1% or less.
This is something you can do today. It's very similar to what you do as a Trend Follower every day to make sure the system works.
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