We have been talking a lot about risk management and how it relates to being a successful trader. In fact, three of the first five trading quotes in the 100 trading quotes series related to risk management. This should clue you in on how important I believe risk management is to winning as a trader.
My latest BOW winning trade, SHAK, is a great example of applying risk management. A range had developed in the stock’s setup that allowed me to enter at $45.92 with a stop under the $45 level. I was risking $1.
My target was $50.50, which means I was risking $1 in order to make $4.58. That gave me a fantastic 4.5:1 reward to risk ratio.
How does this impact my trading over the long term? If I were to have an average 50% win rate with this setup over 100 trades with a 500 share position size, I would make $89,500 over the course of those 100 trades.
Do you see the power of risk management?
This exercise shows that you can become a superstar trader even if your stock picking ability is basically as random as flipping a coin.
The takeaway from this example and exercise is that you should spend as much time studying the risk management aspects of the setup as the pattern of the setup itself.
Took profits in $SHAK today. pic.twitter.com/nD5XQtlCnh
— Paul J. Singh (@PaulJSingh) March 24, 2015
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