How do investors implement trading techniques to generate profits and manage risk at the same time? It is a delicate balancing act.
Trading strategies hinge on the ability to pick the right stocks to trade. But, eually as important is the ability to prevent big losses and hold onto as much profit as you can. You do that with proper risk management.
Trading With Cash Versus On Margin
When you get out into the market, you can either trade with the cash you have on hand, or basically trade with credit. Trading with borrowed money is a bit risky, but the rewards can be great, provided that you manage the risk properly.
One way to do is to put some cash in the account and then trade at something like 4 times the amount of money in the account. This is called leveraging and it is very risky. You can build a nice nest egg relatively quickly by making even just 5 percent profit, but one misstep and you could lose everything.
The Importance of Risk Management
Understanding risk management is the number one priority for novice traders. Even if you have a great success rate, failure to manage your risk can wipe out all your winnings. One massive loss can kill a whole day of small wins. Small wins are the key. Avoiding big losses is just as vital.
What happens when you forget about risk management? You lose all perspective. You hold and hold and hold past your stop-loss and you pray for a turnaround that never comes.
Cap Your Losses
Capping your losses is the closest thing to a sure-fire trading strategy that will never let you down. All good traders accept that a trade has a certain amount of risk, so they set clear rules for each trade and they stick to them. If you have a $50 stop on a trade, stop at $50. Do not adjust your risk parameters in the middle of the trade. Don’t hold and wait for a turnaround. Take the small lump so you don’t get hit with a giant thump at the end of the day.
After you master this idea of risk management, you can go on to learn a variety of momentum day trading strategies that can help you get to the $200 per day baseline of a competent trader.
Look for Warrior Trading on StockTwits for weekly market recaps and call-outs of trades.