Do you ever find yourself having a rough day in the market? Does it cause you to spiral out of control so that by the end of the day it just hurts to look at your P&L? Well, we’ve all had days like that. Without rules to control our emotions we can get swept up in the roller coaster action of the market. Here are 4 rules that I apply not only to myself, but also to my students to help manage your risk.
Place A Max Loss Amount For The Day
Before the start of each trading day, it’s a good idea to have a maximum loss you allow your self for the day. This rule is designed to restrict any additional trades once you’ve lost past this maximum amount. More importantly, its important to establish this amount before the market opens with no access to change it during the day. In fact it would be better to give someone else the clearance to set this lock so that you can’t continue to trade even if you wanted to. Practically all funds use this hard loss rule for their traders and you should too.
Limit your position size
Limit the number of shares you can enter for a specific trade. Sometimes our gut tells us that this trade is about to go! So you increase your risk and up your position size. But inevitably, sometimes you’ll be wrong. And when you’re wrong with a huge size, it can be pretty devastating. Limit the number of max shares you can enter so when your “gut” does tell you to go big, at least you won’t risk destroying your account.
Limit the number of your positions at one time
The greatest traders say that we must limit our focus to just a select number of stocks. As humans it’s impossible for us to process information of more than a few stocks at the same time. If you think you’re an exception then you’re in for a rude awakening.
Have a Max number of losses or losses in a row
Not only is our financial capital important, but also our emotional capital as well. We’re limited to the number of rational decisions we can make in the market before we tire and stress ourselves out. To make things harder, our emotional capital gets depleted faster when we make several wrong decisions in a row. If you close 5 consecutive losing trades, perhaps today is just not your day. Take the day off and come back strong tomorrow.
The most important aspect to trading is not managing winners, but managing your risk. Incorporate these rules into your trading and you’re likely to see big improvements in your trading. If you’re not sure of the setups and price patterns that we’re talking about you can learn them all here at our Bulls Bootcamp. It’s an intensive 60 day course to teach you exactly how I trade and why. To learn more or signup, email me at firstname.lastname@example.org today!