risk management Archives | Bulls on Wall Street

How to Manage Risk Trading a Small Account

Nick P — Mon, 29 Nov 2021 23:55:50 +0000

Trading a small account vs. a larger account requires you to make some adjustments. Especially when managing risk. Risk management is the most important aspect of survival and success as a trader.

These adjustments are key for the longevity of your career, and stable growth of your account. Not only do you have to make changes to your sizing and risk management, but you also will have to make subtle changes to your strategy.

If you are under PDT (less than 25k in your account balance), your goal should be to take every day one by one. Slowly but surely you should be aiming to grow your account, not all in one jump.

Today, we wanted to break down our top tips for managing risk while trading a small account.

Don’t Overextend Yourself

Don’t try to bite off more than you can chew. And by that, I mean don’t try to scale your account too quickly by taking on massive size. This is a marathon, not a sprint. Start small, get your feet under you, learn your strategy inside and out, and grow the account day by day. Growing a small trading account allows you to grow your trading skillset and get experience without risking a ton of money.

Live & Die By 1:2 Risk-To-Reward

Your risk-reward profile on a small account is your life-blood. You will live and die by it. If you aren’t building the habit from the start of your career while you’re trading on a small account, you will never trade a larger account properly.

So, as a set rule, every trade should have the potential to make 2x more than what you risk. That will always keep you on the right side of the growth of your equity curve. Look how easy it is to be profitable if you can live by that:

Trade LESS

Less is more in trading. With a small account, you have to be selective with the setups you take. You have limited ammunition to deploy into the market and a limited amount of money you can risk, so taking A+ setups is the key. Make sure it is a high-probably setup that you have tested or traded before, and fits your risk-reward criteria to a T.

Trade Stable Stocks

Your small account is your precious resource. Protecting it at all costs is crucial. So, if you are trying to protect your capital wisely, do you really want to risk your money on crazy stocks with micro floats that could trap you at any moment? Look to trade slightly higher float stocks with smaller ATRs at first, gain the confidence you need, and slowly progress into more volatile stocks as your account grows.

If you want to check out some more tips and guidelines on managing risk, click below to watch our YouTube video that expands on these topics and more!

Master 1 Set Up

The more types of setups you take when you have a small account, the more likely you are to lose. You only need to master 1 strategy to grow a small account, and keep your risk under control. This will also make sure you are trading less, and help you avoid the overtrading trap. This is especially important if you are trading an under PDT account in the US.

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Risk Management For Day Traders: Rules for Success in Q4 2021

Nick P — Thu, 23 Sep 2021 18:29:56 +0000

Keep having big losers wipe out weeks/months worth of gains? Winning trades turning into losers? Putting your stop loss in the wrong places?

Risk management is one of the biggest factors that determine your ability to be a profitable trader in the markets. Here are 6 must-watch video lessons to improve risk management for day traders and swing traders:

Don’t Give Back Profits Needlessly

Trading is a game where you can make AND lose a lot of money. A crucial trait of winning traders is their ability to hold on to the profits they make, and not give them back. Here is a video lesson from veteran trader Kunal Desai detailing how you can protect existing profits through aggressive risk management:

Combat Revenge Trading

One of the main causes of poor trading risk management is emotions after losing trades. It is normal to feel emotional after losing money. But you cannot these emotions result in you forcing trades on subpar setups. Revenge trading almost always results in you making a red day even worse. Here is how you can combat revenge trading:

Keeping Losses Small to Stay in The Game

There are days where you will have losing trades. But if you remain level-headed and keep those losses small, you can get your PNL back into the green if you capitalize on other opportunities. Here are some tips for going green on the day after a few losing day trades:

Trade, Don’t Gamble

In order to succeed in trading, you have to trade and execute a strategy with an edge. Doing anything else outside of a rigid system is just gambling. Here are some tips to combat the urge to gamble when you trade:

Go For Quality, Not Quantity

When you have a sound risk vs reward ratio on your trades, you don’t need a great win percentage to be a profitable trader. The better your risk vs reward ratio, the less you need to worry about having a high win percentage to make money. Here are some tips from Paul about how to maintain a strong risk vs reward ratio on your trades:

Use Hard Stop Losses

Sound risk management in trading requires a stop loss. You need to always have an exit strategy if a trade goes against you. Some people use mental stop losses, meaning they take themselves out of the market when they get their exit signal, and others use a hard stop loss, meaning they have an automated exit strategy. Here are the pros and cons of using both:

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6 Signs You’re Trading Too Much Size

Nick P — Wed, 01 Sep 2021 16:12:40 +0000

More size means more profits right?

Most of the time, this is not the case for new traders. Money creates emotions. If you increase your size too much, it becomes difficult to control and manage your emotions.

Emotions will be in your trading no matter what. Succesful trading requires not the elimination of emotions, but management.

If any of these signs sound familiar, you need to start reducing your trading position size:

You Focus on Your PNL All the Time

You chase PNL, it runs. This is one of the most common errors a new trader makes: They constantly pay attention to how much they are up or down in a trade.

This causes poor decision-making because you’re making decisions based on your PNL instead of the market trend.

Pro tip: Hide your unrealized PNL on a trade. This will help keep your focus on what matters: The charts.

You Cannot Leave the Computer

A trade shouldn’t chain you to your computer to your phone. You should be able to comfortably leave for a minute or two without panicking. If you feel too scared to leave a position unwatched for a few minutes, you’re trading too large.

You Take Profits Too Soon

That’s my mortgage. That’s my car payment. That’s a week’s worth of groceries.

When you assign value to unrealized gains in the markets, it can cause you to take profits when you shouldn’t. While this is effective for curtailing greed, in the long run, early profit-taking has disastrous consequences for your long-term PNL. Learn to find that “sweet spot” with your position sizing:

Take profits based on price action, not what the unrealized gain is.

You Stop Out Prematurely

Have you stopped out before because you were scared, just to watch the stock reversed on you and go to the moon!

If you’re jumping in and out of positions, it’s because you’re fearful of the money being risked. Cut down your size to eliminate this fear. Pre-define your risk before every trade: Are you truly okay with losing $200? If that makes you nervous, lower that number.

Losses Cause You to Adjust Spending Habits

Only risk what you can afford to lose. A trading loss should not cause you to change what type of fuel you get at the gas station. Or what type of food you buy.

You can only be a successful trader if you trade what you can afford to lose. NEVER trade with money you need to survive on. You will not be able to view the market objectively and let our trades play out.

Anything can happen in a trade. Even a strategy with an 80% win rate has a 20% of losing on any given trade. Trading with money you can afford to lose allows you sit back and view markets objectively.

You’re Afraid to Take a Loss

We’ve seen it happen too many times. Traders freeze up, and the loss gets so big that they cannot bear to realize it. Eventually, usually by force from the broker, the trader is liquidated and realizes a massive loss.

This is the opposite of what can go wrong with stopping out pre-maturely. Stopping out too late. This ties back into trading with money you can afford to lose: What you are risking on a trade shouldn’t make you so emotional that you freeze up.

Struggling with managing your trading positions correctly? We have multiple classes dedicated to this important topic in our 60 Day Live Trading Boot Camp:

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Essential Strategies For Keeping Losing Trades Small

Kunal Desai — Mon, 05 Nov 2018 14:00:05 +0000

No one likes to admit they were wrong. Especially when you spent hours planning that trade, and you know that the company is undervalued. Inability to keep losing trades small is the most common trait of failed traders.

Risk management is an essential component of a successful trader. It is even more important than having a high win percentage. But so many losing and inexperienced traders fail to exercise consistent risk management.

Often losing traders will have it backward: They will show patience with their losing trades, but not with their winning trades. Let’s talk about why so many traders have trouble with this, and how to resolve this issue that plagues them:

Combat Stubbornness

The most common reason why traders have issues cutting losses where they are supposed to be stubbornness. Traders don’t want to admit they are wrong because their ego is in control of their decision making. In trading, you will reach a point will you will know what you should be doing to succeed. But because we are human, we get in our own way and prevent ourselves from doing what we are supposed to do.

We are own worst enemy in trading. Not the market makers, the algos, or whoever else losing traders like to blame when they lose in the market. Our ego is the biggest obstacle to keeping losing trades small. The first step to overcoming stubbornness is to understand that you are in control of your trading results, not any of the other market participants.

Taking full responsibility for all of your trading results will allow you to subdue your ego, and allow you to change what is needed for you to become a successful trader.

Focus on Making Money, Not Being Right

If you find yourself consistently struggling to cut losses, ask yourself this question:

Do I want to make money, or do I want to be right?

If you want to make money, you should always cut your loss at your stop loss. The whole point of trading is to make money. What you think about the company and where it should be valued only matters if the market concurs with your opinion. Price action always matters more than your opinion.

Great companies can keep dropping lower. Terrible companies can go up 1000%. One of the best trading quotes:”Markets can stay irrational a lot longer than you can stay solvent.” Before every trade you need to have a plan if your trade thesis is disproven. There is not a single trading strategy out there that wins 100% of the time. You always need to have an exit strategy. Use hard stops to take yourself out of the market if you are having trouble taking yourself out of the market.

Small Losers Allow Your Winners To Grow Your Account

Look back at your day to day PNL at the end of month. Note how many winning days do your losing days wipe out. If one red day wipes out ten green days, you can have a month with 20 green days and two red days, and not make any money. When you flip this, and make one green day equal to 10 red days, it becomes so much easier to grow your trading account.

It is more realistic to maintain a risk vs reward ratio of about 3:1 on your trades. This means your winning trades are on average 3 times as big as your losing trades. With risk management like this, it becomes so much easier to be a profitable trader. You can have a win rate as low as 40% on your trades, and still make money in the long run.

Let’s say your average winning trade is $300, and your average losing trade is $100, and your win rate is 40%. If you take ten trades, on average you will be making $1200 (300 x 4) from the winning trades, and lose $600 (6×100). This means you will make $600 in profit on average at the end of 10 trades.

In trading, it only takes one really bad day where you didn’t cut your losses to end your career. Focus on consistent, steady results in the market. Being a successful trader is just as much about keeping the money you make, in addition to actually making money. In order to keep the money you make, you must be able to keep your losing trades small.

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Pot Stock Trading For Beginners: 4 Essential Skills

Kunal Desai — Wed, 19 Sep 2018 14:00:28 +0000

The pot stocks trend is far from over. All the stocks we talked about in the series, TLRY especially, have been on monster runs the past month, and seem like they still have juice left in them. However it is one thing to know what stocks to trade and what patterns to look for, and another thing to actually MAKE money. In this article, we are going to talk 4 essential skill sets that you need to make money on pot stocks, and all other stocks as well.

Timing Your Trades

Even if you have a stock like TLRY that goes from $100 to $200, you will not make money (and possibly lose money) if you buy, sell, or short at the wrong times. Timing is the difference between winning and losing traders. A lot of people believe that TLRY is very overvalued. They may be correct in the long run, but the stock keeps surging up, and could end up squeezing you, and blowing up your trading account. You HAVE to learn timing in order to become a successful trader. Check out this video to learn how I time my trades:

Psychology

In trading, it is not the market makers, the algos, and insiders that stop you from making money consistently. It is the person you see when you look at when you look in the mirror. In order to become a successful trader, you have to know yourself, and your strengths and weaknesses very well. You have figure out how to stop getting in your own way.

Trading strategies are simple, but its our own psychology that stops us from executing them correctly. Understanding the concept of preserving your mental capital is just as important as preserving your financial capital. Watch this video to learn about mental capital and trading psychology:

Risk Management

Risk management is the difference between winning and losing traders. Many novice traders focus on their win percentage, and think it is the only metric that determines whether they are a profitable trader or not. The reality is that metric means nothing without knowing your risk vs reward. Anyone can make money in the stock market.

Your risk management is what determines whether you keep the money you make. Making money over an extended period of time requires you have to successful risk management in order to survive. Risk management is what determines how much of the money you make you actually keep. Check out this video to learn everything about it:

Scanning

This component is important, but not quite as important as new traders think. Finding the right stocks to trade is not difficult. The hard part is buying and selling at the right times, or shorting and covering at the right times, risk management, and psychology. However, it is important to learn scanning to find stocks before they go on big runs, but also to become self sufficient. Our scanners are useful for giving us alerts to when pot stocks are picking up momentum. Check out this article to learn all about how we do our scanning.

Free Webinar On Pot Stocks

On our free webinar we will go through all of these concepts in detail, and how you can use them to trade pot stocks profitably. Join our next live webinar where we will go through all Weed Stocks we’re trading + get our Weed Stock Guide free. Reserve your seat here.

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Risk Management Lesson: Giving Back Profits Needlessly

Kunal Desai — Thu, 13 Sep 2018 14:06:05 +0000

Every day trader has had to deal with the pain of giving back profits after you are up on the day. It is one of the worst feelings in trading, and for some it feels worse than just having a small red day. In order to succeed as a day trader, you need to know how to avoid unnecessarily giving back your profits on the day.

Today we are going to go over our trade in SIG in how we were up on a day when there were few trading opportunities. A proper mindset would be to take your profits and run, but in our case we decided to stay around and take two losses in SIG which turned a green day into an easily preventable red day. Let’s talk about some strategies you can implement so you can avoid giving back profits unnecessarily:

Avoid Overtrading

Overtrading is the primary cause of traders giving back profits. Overtrading is when you start taking subpar setups because you want to be more green on the day, or less red. Taking more trades makes it feel like you are being proactive and doing something to make you more money. The reality is this behavior will result in you giving back your profits unnecessarily, or making your red day worse.

It is okay to take your go-to setup when you are green on the day, because you know that this setup has a high probability of making you money. But once you start taking random trades on setups you are unfamiliar with, that is when you venture into the realm of over trading. When you start to take these random setups you are essentially just gambling, since you have no edge in these scenarios. When you start to see signs of yourself over trading, it is a great idea to stop trading to protect your profits.

Leave Your Computer After The Morning

A great way to avoid over trading is to leave the computer. This completely eliminates the temptation to keep trading. Shut down your trading platform, and go have lunch, go for a walk, or do some other work. Do anything to avoid sitting in front of your computer in front of your charts. You are going to start trading just to keep yourself entertained, and end up taking dumb trades. On the day when I was trading SIG, I should’ve just left to go to the beach. I made the mistake of forcing trades on a day where there was really nothing to trade, and ended up giving back all of my gains from the morning. Check out this article to learn more about why you shouldn’t trade after 11am.

Don’t Risk All Your Profits On One Trade

There are going to be scenarios when you are having a nice green day, and your go-to setup comes along. This is a great position to be in because you are basically risking the house’s money now. But I advise new traders to avoid risking ALL of your profits on the next trade when you are already having a great day. Even if it is a high probability trade, there is always a possibility it will fail. Most traders I know find it very painful to go from being up $400 on the day to ending up flat on the day.

Instead what you should do is just risk a quarter or half of your profits. This allows you to still capitalize on your setup, but without giving back all of your profits. If you are up $400 on the day, and you have a $5000 account, it would be a great idea to just risk $100 or $200 on the next trade. This way you won’t get FOMO from missing your go-to setup explode without you, and you won’t have to fear about giving back all your profits.

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The Three Phases of Successful Trading | Momo Trader Day 2

Kunal Desai — Thu, 23 Aug 2018 22:42:20 +0000

Successful trading is not an overnight process. Many people get into trading because they think it will be an easy way to make a lot of money without hard work. This couldn’t be further from the truth. Trading is no different from any other entrepreneurial adventure. You need an education, and you have to put in a lot of lonely hours in front of the computer.

However, there is no other profession that has the same level of freedom. No boss, no salary cap, work from anywhere with wifi, and when you get good, you can scale your income. Today we’re going to identify the three phases we see our students go through on their path to successful trading. Note these don’t always occur in this exact order, every person is different and unique.

1. Finding Your Niche

There a ton of different trading instruments, trading styles, and trading strategies out there. It can be quite overwhelming at first. To start out, you need to figure out on what time frame you will trade on. Are you a day trader, swing trader, or long term investor? Or some mix of the 3? What you chose will often depend on your personality and time commitment you have available.

When starting out it’s recommended you pick a very specific niche where you look for one trading setup that you know inside and out. For example, it’s good to be day trading opening range breakouts on stocks with earnings breakouts. Whatever it is, you have to master one trading setup before you can master more.

Traders often make the mistake and try to be the jack of all trades, and trade everything that they “feel” looks hot. You have to develop the discipline and patience to wait for your “go-to setup”. Otherwise you will never make it as a successful trader who can do this for a living.

2. Follow Risk Management Rules Like A Robot

Over the course of the trading year, risk management is the difference between winning and losing traders. Losing traders are not losing traders because they cannot put on a winning trade. They are losing traders because they don’t follow proper risk management rules and let emotion take over.

The most common combination we see is students who actually have a decent win percentage, but their risk vs reward is poor so they end up not making any money in the long run. These traders will often go on a hot streak of 5-10 consecutive green days, and then give back all their gains and then some in one trading day where they got stubborn.

Another common mistake traders will make is that they will take profits too soon. They get in the green on a trade, and they immediately lock it in because they are afraid it will turn into a loser. This behavior not only makes you emotional because you sold too soon, but it also skews your risk vs reward on your trades in the long run. Your losers will consistently be bigger than your winners because you are taking profits too soon. Developing a solid risk management strategy and following it like a robot is crucial to your success.

3. Mastering Your Psychology

Psychology is one of the most complex topics in trading. Trading psychology is what allows you to execute your trading strategy effectively, without letting you get in your own way. In trading you are your own worst enemy. Even if you have a profitable trading strategy, psychological obstacles can prevent you from executing the strategy correctly. There are three common psychological issues traders have to overcome: Fear, stubbornness, and greed.

Being overly fearful will prevent you from becoming a profitable trader. “Scared money don’t make money.” Fear of missing out on a big move will cause you to get bad entries. Fear of losing will cause you to misperceive market information, and not give your trades space to breathe. Fear in your trading will often be the result of trading too much size, because you are emotionally attached to the money you’re risking.

Stubbornness is a big issue for many traders. They really believe their trade thesis is correct, and don’t want to cut their loss and admit they are wrong. The market doesn’t care about your opinion. The stock market is just a mechanism for displaying information. If the market is showing you that your opinion is wrong, you have to listen to it. Losing trades are inevitable in trading, therefore you always have to prepare a course of action for your trade if it turns out to be a loser. Stubbornness can cause your trading career to end in a single day if you do not cut your losses when you are supposed to.

Greed causes you to incorrectly manage a trade because you want a big winning trade. Every winning trade will not be a home run. Trading for a career is about making consistent gains, not just one, over-leveraged, winning trade. Greed will cause you to act irrationally in the markets because you want to make a lot of money fast. It will cause you to not take profits when you should because you want a big winner. You are not listening to what the market is saying. Instead you are being controlled by a certain $ amount in your head that you want to make.

Did you check out day 1 of our Momo Trader Series? Yesterday we talked about ‘Who We Are As Momentum Traders‘.

Free Webinar With A Successful Student

We will be hosting a free 2 day webclass on Aug 28th and 29th. We invited one of our students who has taken our bootcamp and has created some great success in trading for himself. His name is Brian and he will teach his method for trading on the 29th. Reserve your seat here.

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5 Great Trading Movies Every Trader Must See

Kunal Desai — Wed, 25 Apr 2018 16:15:10 +0000

Trading movies and documentaries are a great way to get excited about trading and the possibilities of making money. There are also some great lessons on what NOT to do when getting involved in the markets as most deal with extremely aggressive plays or illegal activities. Here are 5 great trading movies & documentaries every trader should watch:

**1. Margin Call (2011)**

Great movie about the early stages of the financial crisis of 2008. The movie is a story about an investment bank that has an over-leveraged portfolio of mortgage-backed securities. Once the firm discovers that the firm is on the brink of destruction, the bank tries to make a plan to save their clients’ portfolio from destruction, and how they will avoid a margin call on their positions. Many good lessons in this movie about risk management, the importance of using margin correctly, and keeping losses small.

**2. Boiler Room (2000)**

If you are unfamiliar with “pump and dumps” and “boiler rooms”, this is a great movie to get educated about them. A boiler room is essentially a stock brokerage that uses its brokers to create demand from unsuspecting and uneducated individuals who buy stock in worthless companies. The brokers make a ton of money from commission selling these terrible companies, and from dumping their shares after investors buy up the stock price a ton. The Movie takes place in 1999 when boiler rooms were prominent. The story is told from the perspective of a 19-year-old drop out who joined the boiler room on promises of riches and quick money and ends up discovering the reality behind the wealth everyone flaunts.

3. To Catch A Trader

Amazing documentary about the legendary Steve Cohen, one of the most successful hedge fund managers of all time. Documentary goes into depth behind his hedge funds, known as S.A.C. Capital Advisors, L.P, and what made them successful. Documentary also goes in great depth about the 2010 insider trading investigation of SAC, where they ended up having to plead guilty and pay $1.2 Billion in penalties, although no formal charges have been filed against Mr. Cohen himself. A great show called BIllions is based off him. Highly recommend this show as well. Watch the full documentary here.

4. Rogue Trader

Thrilling movie based on the true story of former derivatives broker Nick Leeson and the 1995 collapse of Barings Bank. Nick gets hired as general manager of the trading floor on the SIMEX exchange. He ends up gambling all of the bank’s money away and ends up in more than $800 million in debt. Many lessons in this movie about the importance of controlling your ego in trading.

5. Wall Street Code

A Recent documentary that delves into the world of high-frequency trading and computerized market making. My good friend Haim Bodek stars in this movie and gives invaluable insight into what is really happening to retail order flow and just how rigged the system is against retail traders. Several other former quant traders are interviewed as well. You learn how our financial system has evolved since it has become dominated by algorithmic and high-frequency traders since the late 2000’s. Watch the full documentary here.

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How To Turn Your Fear Into Trading Profits

Kunal Desai — Tue, 10 Oct 2017 22:07:22 +0000

Fear is responsible for around 90% of the mistakes new traders make. Fear will usually manifest itself in three different forms in trading: Fear of losing money, fear of missing out, and the fear of uncertainty. Here are three ways you can combat these fears to help you take your trading to the next level.

Study Your Data: Know Your Best Setups

In the article “7 Hacks For Newbie Traders To Win Faster”, we mentioned how your trading journal will tell you what setups you perform best in (earnings breakouts, parabolic shorts, red to green, etc). If you can accurately assign probability to every scenario you encounter in your trading day you will know exactly what situations to get involved in, and which ones to avoid. If you don’t have a trading journal, it will be hard to assign probability to any trading scenario making it hard to find or define your edge.

There is no trading strategy that wins 100% of the time. Whether a trade is going to be profitable or not is an unavoidable uncertainty in trading. Once you can accept this, you will realize there is no reason to fear being wrong because it is out of your control.

One of the hardest parts of being a new trader is that you don’t know what trades you should be taking because you haven’t defined yourself as a trader yet. Uncertainty of whether you should be in a trade or not can be eliminated once you can define your most successful trading scenarios and assign probability to them. Once you can do this, you just have to wait for these setups and ignore everything else. Your fear of missing out on a big move will also decrease because you know that the stock that made that big move was not one of your go to setups. If you cannot define the scenario and assign probability, you’re just gambling even if the trade would have played out nicely.

Come Prepared To The Market Every Day: Develop A Winning Routine

Preparation creates confidence and confidence eliminates fear. You cannot roll out of bed at 9:15, ask your chatroom what everyone is watching, and expect to trade for a living. If you’re just following others alerts and ideas and not doing your own preparation, you will always be trading with fear because there are so many aspects that are uncertain. If you have recorded and categorized all of your trades and have a sufficient sample size to trust the data, you will know what setups you will be looking for in the morning, and you can create a winning routine for yourself.

Before 9:30 AM you should have your own watchlist ready, and have a trading plan for all the stocks on your list. You should know all of the key areas of support and resistance are on the daily, what sector each stock is in, what the float is, how much you’re willing to risk on each trade, what direction your bias is (long or short), any news catalyst causing it to gap up or down, how it’s trading relative to other stocks in its sector. You should try to prepare for as many scenarios as you can for all the stocks on your watch list. Here are a few questions you can ask yourself:

What will I do if XYZ stock opens weak?
What will I do if it opens strong?
Do I want to scale in or go full size immediately?

Once you have done all the proper preparation, there will be much less uncertainty in your trading.

Risk Proportionately To Your Account Size

Sizing in too large relative to your account size is the number one cause of the fear of losing money. For example, if you’re trading a $2000 account and you’re using all of your margin to short 2000 shares of HMNY, of course you’re going to be shaking with fear. Your fear will either cause you to freeze and not stop out when you’re supposed to or cause you to panic and stop out as soon as it goes 1 tick against your position. Ideally you’re only risking 1-2% of your account. This proportion will allow you to focus on letting the trade play out and not on the money at risk.

If you’re not sure of the setups and price patterns that we’re talking about you can learn them all in our Bulls Bootcamp. It’s an intensive 60 day course to teach you exactly how I trade and why. To learn more or signup, email me at kunal@bullsonwallstreet.com today!

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Risk Management: The Importance of Sizing Your Trading Positions Correctly

Kunal Desai — Sat, 23 Sep 2017 14:35:17 +0000

Risk management is an essential component of any successful trading strategy. Small losers are just as important as the big winners on the path to becoming a consistently profitable trader. Effective risk management cannot happen unless you are comfortable losing the money you plan to risk.

Newer, under capitalized traders are especially prone to inappropriate sizing. This causes them to trade emotionally, make poor decisions, and prevent them from letting their trades play out to their full potential.

Set Realistic Expectations: You Cannot Avoid Losing Trades

Losing money is apart of trading. No strategy wins 100% of the time. Therefore, to become a successful trader, you must become comfortable and familiar with losing. A big part of this process is sizing your trades appropriately based on your account size and risk tolerance. You cannot get $1000 winners by risking $5 on a trade.

Most successful trading systems will consistently give 2:1 and 3:1 on your risk, so adjust your expectations accordingly. To make that $1000, you will probably have to risk around $500. Don’t let any random twitter guru fool you into thinking that you can make $500 a day with a $2000 account when you are inexperienced.

Be Comfortable With What You’re Risking

If you have a $5000 account you don’t want to be risking $500 on a trade. If you’re risking 10% of your account, you will not be able to manage risk correctly because you will be far more emotional than if you were risking $100. You will most likely stop out too early because it went a few ticks against you and you got scared, or you might freeze and not do anything when you are supposed to be stopping out for the loss. Nothing should change in your life if you lost the money you decide to risk on a trade.

If you risking $100 instead on a trade, you will not be devastated if you take the loss, and your buying power won’t be crushed. If you feel like you can’t leave the position you have on for a few seconds, you’re trading with too much size. Everyone has different risk tolerance, and building size takes time. You cannot go from risking $100 per trade to risking $1000 per trade over night. You want to gradually increase your risk as your account grows and you become more consistent.

Use Hard Stops and Hide Your Unrealized PnL

Using hard stops (especially if new) will help you learn to accept the risk you’re putting on. This will help you micromanage your trade less and let your trades play out to their full potential. Once you enter your trade, immediately set your stop, set a limit order for your first profit target, and let the trade play out. The trade either works or it doesn’t.

Hiding your unrealized PnL will also help you embrace your risk and let you let your trades play out with less emotional attachment to the money on the line. These things will not just help you become a more profitable trader, but will make trading a more relaxing and less stressful experience as well.

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