The most effective traders think of themselves as risk managers.
I know this sound boring, but it’s what separates winners from losers. You can be the greatest stocks picker in the world, but if your risk management is not strong it’s a virtual guarantee that you will blow up your account at some point.
To the point, I blew up two accounts when I first started out, specifically because I did not understand how to management risk.
Where risk management because the most important is during hard market pullback and spikes down, or downtrends.
This is when many traders give back most of their hard fought gains. Often traders will give back more during a quick down move than they made in months of trading the uptrend.
Ideally we want to make at least two dollars for every one dollar we risk. If we do this, we can trade at under a 50% win rate and still be wildly successful traders.
Let’s look at the sample of 10 trades I made for the bullsonwallstreet.com swing service.
Keep in mind that many of these trades came while the market was pullback back hard after a big run.
As we discussed before, this is the spot where most traders give back much of their gains. While I would have been happy to break even in this spot, I actually achieved a 4-5% account gain during this period.
Notice that most of wins are bigger than the losses (by a margin of 100%).
The average win is over $1800, while the average loss is under $900. So although I lost on as many trades as I won (5 wins vs 5 losses), I came out ahead by $4600.
Here are the important stats:
- 10 Trades
- 5 wins, 5 losses 50% win rate
- Wins+$9032 Losses $4411
- Average Win $1806
- Average Loss $882
- Realized RR 2.04 ($2.04 profit for every $1 risked)
Watch this video. I go into these stats in more detail and show you how to manage risk effectively.