Here is the article.
Many traders see trading as an opportunity to make money but the potential for loss is often overlooked. By implementing a risk management strategy, a trader will be able to limit the negative effects of a losing trade when the market moves in the opposite direction.
A trader who incorporates risk management into the trading strategy will be able to benefit from upside movement while minimizing downside risk. This is achieved through the use of risk management tools like stops and limits and by trading a diversified portfolio.
Five risk management tools to learn from:
- Determine the risk/exposure upfront
- Optimal stop loss level
- Diversify your portfolio: the lower the correlation, the better the diversification
- Keep your risk consistent and manage your emotions
- Maintaining a positive risk to reward ratio
1) Determine the risk/exposure upfront:
Risk is inherent in every trade which is why it is essential to determine your risk before entering the trade. A general rule would be to risk 1% of the account equity on a single position and no more than 5% across all open positions, at any time. For example, the 1% rule applied to $10,000 account would mean no more than $100 should be risked on a single position. Traders will then need to calculate their trade size based on how far away the stop is placed in order to risk $100 or less.
The benefit of this approach is that it helps to preserve the account equity after a run of unsuccessful trades. An additional benefit of this approach is that traders are more likely to have free margin available to take advantage of new opportunities in the market. This avoids having to forgo such opportunities due to margin being tied up in existing trades.
Actionable items
I should practice how to put trailing stop and then practice a few times. It is important for me to learn the concept of trailing stop and make it work first using Ameritrade.com.
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