In our Explosive Options trading chat room, I share a lot of trade ideas. But I also talk a lot about basic risk management in trading.
When you hear stories about massive winning trades, you may fail to realize that those traders have also had plenty of losses. Trading is not a game of perfect.
Even the great Michael Jordan missed far more shots than he made, but he still won six NBA championships.
In a similar vein, tennis great Roger Federer only won about 50% of the points he played, but he still won 20 grand slam tournaments. He didn’t need to win every point to be a champion. And you don’t need to trade perfectly to be a successful trader or investor.
Basic risk management in trading
It all starts with understanding that this is a risky game of constantly moving capital around.
You will lose trades, and when you do, you need to accept the consequences so you can move on to the next trade.
I still suffer losses, but I make sure I never place at trade that I cannot afford to lose. You should only be trading about 3% of your account at any one time.
I also keep index puts working to protect my portfolio from any unforeseen downside, and I cut losses quickly and take wins when I have them. DO NOT wait for your trade to keep getting bigger. That’s a recipe for disaster. You never know when the trade will reach its top and the sellers will come out in droves.
If you’re worried more about managing your losses than your winners or vice versa, you’re imbalanced and you’ll miss a chance to book a winner. Care about them both equally!
Knowing you will have losses – and knowing how to handle them – puts you far ahead of most traders.
We would all love to be perfect traders. I’m sure a basketball player would like to be perfect shooting hoops, but it is just not realistic.
