The following thread will be on Risk Management, why it is so important, and steps we can take to guide us in the right direction:⬇️
So when talking about Risk Management, we must first understand what exactly this means. Risk Management is essentially preventative actions we can take to protect ourselves in the stock market.
Losses can add up quickly, our mental fortitude can deteriorate, and we will feel the urge to give up if we are not applying proper Risk Management. Let me run through some scenarios that we have all been through, and steps we can take to prevent them in the future.
Scenario A, Bag Holding: We end up entering a position with 0 plan, and it inevitably backfires on us. We are now staring at a sizeable loss, and the only thing we can think to do is hold in "hopes" it rebounds in the future.
This ties our capital up, and does not allow us to actively work towards growing our account at an efficient rate. This is something we have all been through.
Scenario B, Not Respecting A Stop Loss: We enter a position, either tell ourselves we are going to use a mental stop, or no stop loss at all. The trade backfires on us, we don't respect our mental stop, now we sell for a huge loss that could have been easily avoidable.
Scenario C, Chasing: We chase an entry off someone else's alert, or because we "fomo" into a position. The stock ends up dumping on us, we either sell for a sizeable loss, or left bagholding.
Scenario D, Revenge Trading: We experience a loss or two throughout the day, and now we tell ourselves we "must" make our money back somehow. We force a trade, that goes against us as well, and now we take a real hit on our account.
Scenario E, No Goal / Plan: We continue to take trades with no daily, weekly, monthly goal. We have no plan when entering a trade, so at best we end up break even every day.
Scenario F, We Rely on Someone Else: We take trades soley based off others alerts because we think they are going to get us rich. We do not put the effort in to learn ourselves and we take a sizeable hit on our account.
Scenario G, Improper Position Sizing: This occurs way more often than it should. People want to get rich quick and treat the market like a casino. We go all in on something and blow our account up, or take too big of a position relative to our account and make bad decisions.
These are all scenarios many if not all of us have been in. Some of us have experienced every single one of these and more. These should be viewed as learning experiences, and we should actively work on never doing these again.
Let me now discuss the key factors to a winning "recipe" when it comes to longevity in the market. By practicing the following, you will be 100x better off than you were before.
Having A Plan: It is essential that we have a plan before entering a trade. This includes where we are looking to enter and exit, the risk to reward ratio on entering the trade, and making sure we trade something we are comfortable with.
Stop Losses: A stop loss is a new trader's best friend. This tool will allow you exit a trade if it starts to go against you for a minimal loss. No one obviously wants to take a loss, but we must think about the bigger picture. Would I rather lose 5% on a trade, or 50%.
Scaling Profits: Scaling profits on the way up and covering cost basis is one of the most important things we can do as traders. This essentially allows us if done properly, to win a trade even if we are only to scale out once.
Proper Position Sizing: This is crucial for a new trader who does not have enough experience in the market. If you are taking position sizing that is too big for you account, this will enable bad decision making when trading.
Self Sufficient: Having to rely on someone else when trading, is the biggest mistake you can make. We all need to strive to become self-sufficient and able to make decisions completely on our own.
All in all, it comes down to being self aware and recognizing or admitting where we are going wrong. Until we can do that, we will continuously make the same mistakes. It is up to you to correct these errors and start taking steps in the right direction.
To Recap:
-Respect Your Stop
-Stop Relying on Others
-Scale
-Have A Plan
-Respect Your Stop
-Stop Relying on Others
-Scale
-Have A Plan
As always, I hope this will help some of you and guide you in the right direction. I hope you were able to take something from this!
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