Robust risk management is the key to long-term trading success and protecting your hard-earned capital.
Without prudent risk controls, it’s easy to get wiped out during inevitable drawdowns.
In this post we’ll explore pro tips to upgrade your risk management approach:
Use Stop Losses on Every Trade
Stop losses minimize damage when you’re wrong.
Place them at technical levels where your trade thesis would be invalidated if hit.
Exit trades quickly when things don’t go as expected.
Size Positions Appropriately
Position sizing is critical. Risk no more than 1-2% of capital per trade.
Size down when on a losing streak. Take smaller positions in volatile markets.
Manage Your Overall Risk
Consider risk across your entire portfolio. Diversify across assets and strategies.
Limit your total simultaneous open risk. Avoid overexposure.
Have a Drawdown Limit
Define the maximum peak-to-valley drawdown you can stomach, like 10-20% of capital.
If hit, reevaluate your approach before continuing trading.
Don’t Average Down
Throwing good money after bad by averaging losing positions rarely ends well.
Stick to your stop loss rules and maximum loss per trade.
Follow Broader Risk Management Guidelines
Stick to trading only liquid markets you understand, and avoid excess leverage.
Going broke slowly is still going broke.
Track Your Risk Metrics
Analyze metrics like your risk/reward ratios, win rates, Sharpe ratio and beta to optimize your risk efficiency.
Learn to Be Wrong Small and Right Big
Master cutting losses quickly while allowing winners to run.
The key is asymmetry between your average winner and average loser.
By making ongoing improvements to your risk management process, you protect profits while weathering markets’ inevitable ups and downs.
Defense wins championships in trading.
With robust risk controls, you can trade confidently knowing one blow up won’t wipe you out.
Allow your edge to play out over the long run. Keep fine tuning your risk management as the markets evolve.