Risk management is one of the most overlooked aspects of investing and trading. Too much energy effort and focus is placed on entries and picking the right stocks. Risk management is the defensive aspect of trading. A lack of respect of risk is what removes many traders from the markets permanently at all levels.
Here are ten good reasons that risk management is so damn important in trading the markets:
- Proper position sizing removes most of the emotions from your trading.
- Risk management limits the size and duration of drawdowns in both trading capital and emotions.
- Proper risk management can bring the probabilities of the risk of financial ruin to almost zero.
- Proper risk management can bring the probabilities of the risk of mental ruin to almost zero.
- Position sizing based on volatility and limit losses.
- Limiting losses to keep them small can greatly increase the odds of profitability.
- The number one reason most traders are unprofitable over the long term is large losses. Risk management helps eliminate any large losses.
- A diversified trading system can limit risk of over exposure to just one asset class.
- If you can stay in the game long enough, your odds of success increase, risk management will keep you in the game.
- Risk management will give you a price level that tells you when to get out when you are worn. Having no stop loss on a trade is like driving a car with no brakes. No matter how great the car is, you will eventually crash.
Always manage your emotions, your ego, and most of all your exposure to risk.