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Friday, June 21, 2024

A Few Words On Stock Trading Risk Control

May 30, 2008 by  
Filed under Featured Stock Trading Articles


There is one simple thing that can make the difference between success and failure in your stock trading. It’s not some magical formula or some Holy Grail as many might have you believe.

It’s very simple basic rule that every successful trader must follow. That is the rule of risk control. If you do not control your risk you cannot possibly control of your reward.

Risk can be controlled in a number of ways. The first type of risk control is controlling the amount of your account equity that you risk per trade. For instance, if you risk $1000 on a trade and you have an account equity of $100,000 in your risk per trade is 1%. There will be losses in all trading and risking a small amount of your equity per trade can help you survive during strings of losses. In this example, you have effectively reduced your risk of ruin based on the unlikely probability of having 100 losses in a row.

If we take our $100,000 of equity and risk $50,000 per trade we are of course skating on very thin ice. If we experience just two consecutive losses our account equity will be wiped out and will not be able to profit from future trading opportunities. Our initial objective in using risk control is not to have exceptional profitability, but to survive in an ever changing market. Risk control allows us to go through the inevitable string of losses and weather the storm to survive.

Having good risk control measures in place forms the foundation of a good stock trading plan. If you do not have a good risk control plan in place in your options are very simple, simply do not trade. Make a decision now to always keep your risk under control. This one simple thing will save you tons of losses, grief, and frustration in your future trading.

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