Trade Management – A Consideration (Part 1)

If you ask someone make a list of what keys to being a successful trader are, I contend not every list will have a mention of managing your losses. This, I contend is at times, if not at all times just as important or more important than paying attention to your gains. I will show you a couple of trade management considerations that should you incorporate them into your trading plan could help improve your success.

Items on their keys to being  successful trader there will inevitably be things on there like, ‘win more often than you lose’, buy low sell high, cut your losers short and let your winners run’.

That last one is in the ballpark of what I want to educate you on with this article, but often those are just words that don’t have anything tangible to explain what that means to do that – cut your winners short and let your winner run.

Let me offer you this.

Win versus Loss Trade Management

What is your risk management plan – do you have one? Do you adhere to it? Do you take your losses when you should, or do you let them get away from you more than you should?

The key is knowing it is not the number of wins vs losses that make or break a system, but how robust your wins are versus how limited your losses are.

A person can win 3 of 4 trades and win a $1 / 1-point on each. That makes a cumulative gain of $3 or 3-points, but if they lose $5 / 5-points on the one loser that wipes out an account. That ends up being an account with a 75%-win rate still losing money.

A person can lose 3 of 4 trades and lose a $1 / 1-point on each. That makes for a cumulative loss of -$3 or -3-points , but if they win $5 / 5-points on the last trade their account is profitable. That ends up being an account with a 25%-win rate (or a 75%-loss rate) that is PROFITABLE!

If You Are Having Trouble Taking a Loss

If you are having trouble taking a loss hopefully knowing the above / being reminded of the above will help with the discipline of taking stops

Knowing the above shows how having losses managed to a lesser amount than your profits should take the pressure on you in your options trading. Consider keeping your risk or cost pr trade the same size. 

Consider a target gain of a twice what your loss is deemed acceptable. Example: Target 100% gain and 50% stop; something that says if I take a bit more quantity of losses, a lower amount of winning trades has a chance of helping the account still be profitable.

It’s tough to take losses; especially when one is looking at the money to potentially make is what one wants to use to get retired and the money being used is also money one can’t really afford to lose.

I am not a money manager and can’t advise you what to do but look at the situation and ask if you are putting too much at risk. Ask if you are risking too much in your loss management plan and are those putting too much pressure on you if the losses happen.

Consider how much risk per trade you are willing to take – Remember the ‘Cost as Risk’ education? If not, I am going to have that second consideration for trade management in next week’s education

Are you risking the same amount per trade and not loading up on the one you feel more confident in?

Last for now – which of the strategies do you feel better about? Maybe focus on one or two – get to a level of consistency you want with those and then add in more later.

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You must be aware of the risks and be willing to accept them in order to invest in the stock and options market. Do not trade with money you cannot afford to lose.

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