Trade to Win: Proven Strategies to Make Money

Chapter 17. Risk Management

Good risk management is critical to any trading strategy. A bit of advice that the experts always give is to cut losses quickly but let winners run. That sounds simple, but it is one of the most difficult aspects of trading. I have heard it said that if the right risk management techniques are used, it is possible to make money with almost any strategy. I do not believe that is true, but I certainly believe that without risk management, any strategy is doomed to fail.

Every trader will make losing trades. Professionals make them all the time. However, when a professional makes a bad trade, he knows how to limit the amount of money he loses. An amateur will hold a losing position and allow his trading account to be bled dry. For that reason, I have several techniques that I recommend to my students and that I use myself. By using these techniques on a regular basis, you are able to hold losses to reasonable limits.

The first step to managing risk in general is to determine your personal risk tolerance. Some folks have more money than others. They may be able to lose $100,000 and not feel much pain. However, another trader may feel extreme pain when he loses a few thousand dollars. A friend of mine recently explained to me his strategy for trading precious metals. I asked about stop/loss placement for his trades. Frankly, the amount of risk seemed a little high to me and I asked about it. "Isn't that too much risk to take?" He leaned back in his chair and ...