Risk Management: Priority #1
The Unsung Hero of Trading
In the trading world, the emphasis on risk management often seems insufficient. While it's commonly recognized as important, the focus frequently centers on potential profits rather than potential losses. You often hear traders regret missing out on a trade for the profit it could've yielded, but seldom do they acknowledge the loss they might have avoided. This fixation on potential earnings can sometimes overpower the critical need for risk management.
There are plenty of trading mentors and educators out there who focus largely on strategies, particularly entries and exits. However, risk management is often just briefly touched upon, overshadowed by the allure of profitable trading strategies. Through my journey in trading, I've learned that risk management is far more vital than any other aspect in this field. Being an average trader but an exceptional risk manager can still lead you to profitability. I frequently tell my students,
"I may not be the best trader out there, but I'm a hell of a risk manager, and that’s been key to my nearly two-decade-long career in this industry."
About seven years ago, I experienced a pivotal moment in my trading career when I started prioritizing risk management. Unlike most traders who focus on the potential target of a trade setup, I shifted my focus to where my stop should be and how much I could potentially lose. This change in perspective helped me to better manage my risk-to-reward ratio. It became a rule for me not to engage in a trade unless it offered at least a 1:1 return, though I typically aim for 1.5:1 or even 2:1.
Remember, nothing in trading is guaranteed. There are high probability setups that work most times, but they’re not infallible. When you're on a winning
streak, it's easy to become overconfident, which can lead to complacency. This overconfidence is often the precursor to failure. In my case, it sometimes led to a complete shift in my trading approach as I started to feel my confidence wane. Overtrading and emotional decisions would follow, quickly eroding my gains. It's a cycle many of us experience at some point, and it can be avoided by consistently maintaining strict risk management.
Another observation I've made is when confidence peaks, and traders start bragging about their success, it often signals a top for their run. This overconfidence may lead to easing off from the system and rules in place, eventually resulting in poor trading decisions. It's happened to me, and I've seen it happen to other seasoned traders too. It's vital to keep the psychology of trading at the forefront, remembering that no one is infallible. With a focus on risk and a proven strategy, the numbers will eventually work in your favor. Find a process that resonates with you, but ensure it places a strong emphasis on Risk and Risk to Reward. With that and a win rate of over 50%, you’re well on your way to a sustainable trading career.
