Day Trading World

Money Management & Risk Control - Part 4

So now that we all understand why money management and risk control are very important lets cover exactly how to apply these rules to your trading. As I stated before, you shouldn't ever risk more than 2% of your account on one trade. But, as I also said, that's a bit much for most people and I'm in that group of most people. I like to keep my risk to around 1%. So lets focus our attention on risking 1% of your account on a trade. For the sake of this example let's just assume you have a very average account size, $25,000:

Say you are scanning tonight and come across XYZ which looks like it might be a great swingtrade buy if it trades at 15 3/16. The low of the prior day is 14 1/2. This means you will place your stop at 14 7/16, risking 3/4 of a point on this trade. Assuming a $25,000 trading account you can lose up to $250 per trade. You will use this number to determine how many shares you can buy, which in this case is up to, but not more than 333. Most people don't like to do odd lots, so would round down to 300. Never round up because then you throw the risk control out the window.

Let me leave you with a few more quotes on risk control

• "If you have an approach that makes money, then money management can make the difference between success and failure... ... I try to be conservative in my risk management. I want to make sure I'll be around to play tomorrow. Risk control is essential." - Monroe Trout
• "If you personalize losses, you can't trade." - Bruce Kovner
• "The best traders have no ego. You have to swallow your pride and get out of the losses." - Tom Baldwin
• "Never risk more than 1% of your total equity in any one trade. By risking 1%, I am indifferent to any individual trade. Keeping your risk small and constant is absolutely critical." Larry Hite.