Stop Trying to Trade and Just Manage Risk
Determine your comfort level with risk per trade. Set up stop-loss orders and consider position sizing. Monitor your plan and make changes. Don't stray.
As a discretionary trader, managing risk to maintain sustainable profitability is essential. Unlike mechanical trading systems, which rely on objective rules, discretionary trading involves subjective decision-making based on market analysis and intuition. This inherently increases the risk of losses. Therefore, it is crucial to implement a robust risk management plan to protect your capital and confidently minimize trading losses.
I understand the importance of managing risk as a discretionary trader. I have developed a risk management plan that suits my trading style and risk tolerance. I have determined my maximum risk per trade to be 2% of my trading capital and set stop-loss orders based on technical levels and volatility indicators. I also practice position sizing to ensure I do not risk too much on a single trade.
Over a year, I made only seven trades (yes, I no longer enter and exit trades on Piggies like a banshee), but each trade was carefully planned and executed with my risk management plan in mind. Despite some losses along the way, I stayed disciplined and did not deviate from my plan.
At the year's end, I made 47.6x on my risk for one portfolio. The average length of my trades was 7 weeks. I knew this success was due to my careful risk management and disciplined approach to trading. I regularly monitor and adjust my risk management plan, knowing that market conditions can change at any time.
With my risk management plan in place, I feel confident in my ability to trade profitably over the long term.
Developing a Risk Management Strategy
To manage risk effectively, you must develop a risk management strategy that suits your trading style, personality, and risk tolerance. The first step is determining your maximum risk per trade, which should be a percentage of your trading capital. Generally, most traders risk 1-3% of their trading capital per trade. Once you have determined your maximum risk per trade, you need to set stop-loss orders to limit potential losses. You can set stop-loss orders based on technical levels, such as support and resistance, or volatility indicators, such as Average True Range (ATR).
Another crucial aspect of risk management is position sizing. Position sizing determines the number of contracts or shares to trade based on your risk per trade and the distance to your stop-loss order. Position sizing ensures you do not risk too much on a single trade and have enough capital to trade another day.
Monitoring and Adjusting Your Risk Management Plan
Once you have developed and implemented your risk management plan, you must monitor and adjust it regularly. Various tools and programs enable manual tracking of a portfolio of trades. Some popular options comprise Excel spreadsheets, Google Sheets, and trading journal software such as TradingDiary Pro, Edgewonk, and Tradervue. Finding a tool that caters to your specific needs and trading style is essential.
Market conditions change, and your risk management plan should reflect those changes. For example, if there is high volatility in the market, you may need to adjust your stop-loss orders or reduce your position size to account for increased risk. Additionally, if you experience a losing streak, you may need to take a break from trading to re-evaluate your risk management plan and trading strategy.
Staying Disciplined
To effectively manage risk as a discretionary trader, it is important to stay disciplined. This means consistently following your risk management plan and avoiding emotional reactions, such as fear or greed, that may cause you to deviate from it. It is also essential to accept losses and avoid taking unnecessary risks to recover them quickly.
Managing risk is a critical component of discretionary trading. Developing a plan, monitoring and adjusting it regularly, and staying disciplined are essential to achieve effective risk management. By implementing a strong risk management plan, you can protect your capital and ensure sustainable profitability.
📣 I put together a 5+ hour course that shows how I used these methods to day trade small-cap stocks. Check it out at delthetrader.com.
If you liked this issue and want to hear more about a specific topic. Let me know in the comments below.
— Del (twitter)