Page 36 - Trading #101 Course – PART II TWO: SUCCESSFUL TRADING PIE – www.traderscoach.com

TRADING #101 COURSE – PART II TWO: SUCCESSFUL TRADING PIE – WWW.TRADERSCOACH.COM

For me, my preference is to get an adrenaline rush from making a steady and
consistent profit. Once you get a taste of that, you will become a believer in using a
money management plan.

Three Ways to Control Risk

As a trader, you have three ways to manage your risk. You are in the driver’s seat and
you will be making decisions on the following:

1. Entry (where to get in).
2. Exit (where to get out—be sure to consider market liquidity).
3. Trade Size (in shares or contracts).

All three of these decisions are critical to your bottom line, and lacking the skill or
knowledge to effectively execute and carry out a well-thought-out plan that incorporates
all three of these variables will result in financial loss.

Risk Factors to Develop Your Plan Around

There is a variety of risk factors in the financial markets, all of which you must plan for.
By knowing the potential risks, you are more able to defend against them.

Here’s a basic list of six risks to start with:

1. Trade risk. This is the calculated risk you take on each individual trade. Your
defense against this risk is to always set a stop-loss exit prior to entering a trade.
A good rule of thumb is to never risk more than 2 percent of the capital in your
trading account on any one trade. Once you identify your stop-loss exit, you can
properly customize your trade size based on this information.
2. Market risk. The inherent risk of being in the markets is called market risk. This
type of risk involves the entire gamut of risk possible when in the markets. Market
risk can be far greater than trade risk. This type of risk encompasses
catastrophic world events and market crashes that create complete paralysis in
the markets. Events causing market gaps in price against your trade are also
considered market risk. Your defense against this risk is to not trade with more
than 10 percent of your net worth.
3. Margin risk. This involves risk where you can lose more than the dollar amount
in your margined trading account. Because you are leveraged, you then owe the
brokerage firm money if the trade goes against you. Your defense against this
type of risk is to use caution with margin and implement stops and proper trade
size at all times.

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