Managing your risk can be the best way to have long term success trading in the stock market. All traders who do not have a risk management system in place will eventually lose their money.
Something that the majority of traders will do is overlook this. They will come in and start picking stocks that make them big money. They decide that position sizing isn’t for them because the more they make more money by using all of their account.
They start making the big bucks and living the good life. They get cocky because they believe that they can always make more money, it just rolls in. But then when the market turns against them they are devastated. What good is making a million dollars if you lose it all in 1 day?
Stories like that are all too common in the trading world. To get around this you must use proper risk management. There are a couple ways you can use it to prevent the markets from crushing your account.
1. Never risk more than 5% of your account in any 1 trade. If you only risk 5% of your account in every trade you can never go broke. You can never lose all of your money no matter how many times you lose.
2. Having both long and short positions at all times. This is something that I have found to be useful. When the markets are bullish then you can make huge returns with your bullish trades, when they turn bearish then you can make huge gains on your bearish trades.
3. Having cash to sit on. This is something many traders do not like to hear but you should always have some cash in reserve. It can be there for a couple reasons but the major reason is that if you lose the money you have in the markets you will always have some cash in reserve.
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