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.
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