Risk Management Strategies – How to Create A Professional Plan
Risk Management Strategies – Why Bother?
Many new traders assume that in order to make money in the stock market you need to “guess the direction”.
However, professional traders have a secret.
It is not about being right, it is all about being profitable.
In order to be a profitable trader you need risk management strategies.
Risk Management Strategies – Winning is Not About Being Right
In a corporate job, you learn very quickly that you need to be right. In fact, you are taught to strive for excellence and perfection.
While trading you can only win one third of your trades – and still make money!
Flipping that around – you can lose two thirds of the time and be profitable. That would never fly in the corporate world.
So how do you make money trading with a 33% win rate? With risk management strategies.
Risk Management Strategies – Calculating Your Win Percentage for Breakeven
Every trade you are placing should automatically have exit parameters in the event you are wrong.
If you lose a pre-determined amount of money, you are taken out automatically to prevent further damage.
This is risk management basics. You call this risk capital.
But what happens if for every $100 you lose in a trade you make $300?
What percentage of the time do you need to be right to be profitable still?
The formula is risk capital, divided by risk capital plus anticipated profit. Risk / (Risk+Reward).
In our example above we risk $100 to make $300 on any given trade.
Therefore our winning ratio is $100 / ($100 + $300) = 25%.
Let this sink in for a moment. You only need to win 1 out of every 4 trades you take, and you can still be break even!
The important take away here is that you will definitely want to have risk management strategies that clearly outline your trade allowance.
Maximum allowable risk, target profit and much more.
In the YouTube video below we talk about Using the Risk to Reward Ratio to Evaluate Your Trading Strategy >
Risk Management Strategies – How to Create a Professional Swing Trading and Day Trading Strategy
If you want to learn more about creating professional risk management strategies we have created another video to help you get started.
Risk Management Strategies Example – SP500 Futures Strategy Cheat Sheet
In the table below you will see my personal risk strategy for the SP500 futures.
As you can see, I risk 5 ticks (1.25 points) on my stop loss and look to capitalize by taking 8 ticks (2 points) of profit.
The orange column shows that if I win just 4 trades and lose 6, I will still be up $25 for the day with 1 contract.
Each futures contract needs just $500 of capital, so you have the opportunity to make massive returns with a small trading account size.
Following the money management, if you win 6 trades and lose 4, you will be up $350 on just $500 of capital.
That’s a 70% return in one day. This is why futures trading is so exciting, and we teach it in full in our day trader pro course here >
Risk Management Strategies – Create One for What You Trade
What are the perfect risk management strategies?
The ones that you create yourself!
Every product will have different risk and reward parameters. Taking this concept further, every product’s risk management strategies will change based on stock market seasonality.
Click here to learn more about stock market seasonality >
Whether you trade FOREX (currencies), futures, commodities or metals you will need customized risk management strategies.
In our Day Trader Pro package here, we show you how to create a professional risk management strategy.
That’s it for today, I hope you enjoyed today’s article.
I’d love to hear from you – what are your favorite risk management strategies and what do you want to learn about next?
If you want to join us in our live trading room, check out the Day Trader package here >
If you prefer to trade more passively, checkout our newsletter, trade ideas and live analysis in the Swing Trader package here >
The information contained in this post is solely for educational purposes, and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable to your own financial situation. TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.