In this article, Cameron reflects on the importance of risk control and how it may serve as the sole foundation of your long-term success as a trader. As Cameron highlights, there are multiple keys to sound risk control which means this article may hold significant value for all YTE readers globally!
Let’s Talk Risk!
When it comes to trading effectively, regardless of the trading discipline you use, it is absolutely critical that risk control be the foundation of everything you do. The interesting thing about risk control is that it can take many forms. In this article, I will explore what I believe are the four most important keys to risk control.
I would like to confirm with everybody reading this article that there are always risks in trading. Your first risk in trading is the risk of losing money. In my experience, the key to making money out of trading is getting very good at not losing it.
Key one. Always trade with a stop loss.
As a seasoned trader and coach, the first thing I teach my clients is to always trade with a stop loss. As the name suggests, a stoploss will stop you from losing money if the market goes the wrong way!
As traders, we need to accept that we will not always get trading right. Therefore, we must have control mechanisms in place to protect against this.
My biggest tip to every trader is- always trade with a stop loss and make sure that your downside is protected every time you take a trade. Modern trading platforms, like the one I use, Ninja Trader, make stop losses easy to apply and hence easy to use while live trading. It just makes sense to limit your risk. The fastest way to do this is through a stop loss placed into the market in the exact location it is meant to be.
On the topic of ‘stop losses’, there is another tip I can pass on that relates to the type of market you are trading. If you are day trading a market which has low liquidity like Silver Futures (CODE: SI) during Australian market open, then I have one very flat piece of advice: stop day trading that style of market. If you are looking at a 5-minute chart of a particular market like Silver Futures, you don’t want to see a chart that has big gaps between closing and opening prices of each sequential candlestick or bar. Later in this article we are going to talk about the different types of markets that are available to you and the significant effect that choosing the wrong market may have on your ability to control your risk while trading.
Key Two. Always set a maximum amount of loss before you take a trade.
In my experience, traders often make the mistake of taking on too many risks. Many industry standards would suggest that risking more than 2% of your capital on any one trade is considered aggressive and I completely agree with this figure.
One of the key advantages we have as traders is, we get to set a maximum amount of risk before we take a trade. Your maximum risk maybe $100.00, it may be $1000.00, the figure doesn’t matter. The key to your risk control is sticking to your maximum risk and not being romanced into the market and into a trade that forces you to carry too much risk because you have a fear of missing out on a winning trade.
Cameron Buchanan is a Founder of the International Day Trading Academy and a passionate advocate of responsible trading.