The Risky Business Of Risk Management

Alright… Not one of the most exciting subjects we have ever covered, but definitely one of the MOST important.

Risk management is something so many traders “think” they have locked down, but actually what they are doing is taking themselves down a road of no return.

Both for them and their account balance.

And what’s worse…

There is a group that simply overlooks risk altogether, or takes some one-time advice that is usually completely inappropriate for them and the way they trade!

So how do you make sure you not only know what to do when it comes to risk management, but you ACTUALLY do it?

First Off…Know Your Numbers

Yes, it’s a small bit of maths, but knowing the simple multiples can save your account balance!

Let’s say you are risking 10% of your cash pot per trade.

But that only requires a 5 trade-losing run to be the best part of 50% down overall.

Oh well, I still have half my money.

Hang on!

You now need a 100% return on that balance JUST to get back to where you were 5 short trades ago.

Let that sink in for a second…

Next...This Game Is NOT The Same As Owning Shares.

When you buy shares (stocks for our US friends) it usually means a 90-95% asset exposure in your portfolio at most times.

This does NOT mean you do the same, or even close to the same, with your Spread Betting and CFD trading.

You should ALSO remember that a blanket £10 per point risk per trade, may seem  cautious, but based on the size of your account, could well be financial suicide!

Even if some so called guru tells you it's OK.

And yes, I sneaked into and event once, only to hear the "so called" expert say...

"Oh yes, just risk about £10 per point, you will be fine."

WTF??

Lastly... Know Your Strategies Key Data Performance Points

Do you have a decent enough data sample to know your win loss ratio, average risk to reward ratio, trade frequency, trade expectancy, worst performing period, and longest  losing run?

If not you should. As these these above performance points are key to establishing the right risk allocation.  

Remember...

No matter how good a trader you are, or you think you are - the losing run IS coming!

And I know that sounds pessimistic, but it's the one ongoing reality for ALL traders.

And that's when the REAL stress test comes for how effectively you have set up your risk management systems?

And whether you have the discipline to stick to it?

Until next time...

Trade Safe

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