Trading is easy. Anyone with a small portfolio can trade.
However, trading successfully is a whole different world.
Successful trading requires a lot of hard work and not everybody can do it. One has to be very disciplined and have a clear trading plan in order to obtain profits from the financial markets.
For this to happen, one has to take into account the number one risk management rule: preservation of capital.
Whenever we open a position we always wish for the trade to move in the right direction. When this happens, and the move is good, we must let this winning trade run for as long as it can. However, sometimes our analysis is not correct and the trade goes against us. Now when this happens, it’s important to cut the loss quickly, since we only want to stay in the position as long as it’s in the right direction.
No matter what trading plan we design and what method we use, we must always keep this rule as number one in our list.
WHY IS THIS MY NUMBER ONE RULE?
Very simple. The markets are all about using money to make money. Without the necessary capital, one cannot trade in the markets. As long as we have money, we are in the position to make money.
Obviously one has to take a certain amount of risk and consider losses as part of our capital as well since they are inevitable. What we can do is reduce these losses as much as possible. This means taking the time and effort to learn how to manage risk by using stops and hedges.
Many new traders tend to jump in without any proper preparation and pay a heavy price for doing so. These newcomers don’t usually have a clear money management plan and they tend to be rash in their trading. Do not become one of these people.
Always remember to preserve your capital. This rule will protect your wealth.
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What risk management rules do you live (or die) by. Share a comment below. Learn more about Daryanani’s work here.
