The Top Ten Metrics of Risk Management

The Top Ten Metrics of Risk Management

In trading there are two sides of the game, how much you can make when a trade is a winner and also how much you can lose when a trade does not work out. It is like in sports where you have to play both offense and defense, there are two sides of a game, how many points you can score and also how many are scored against you. 

Here are the top ten metrics you have to consider when creating your own risk management strategy. 

  1. Your position sizing should be based on the projected worst case scenario for a trade. 
  2. Let your markets volatility and trading range determine how big your trade should be.
  3. Your stop loss has to be set at the price level that should not be reached if your trade is going to work out. 
  4. Every trade has to be considered for the Risk/Reward Ratio. Your stop loss creates the risk for each trade and your potential profit target creates your potential reward.
  5. Never lose more than 1% of your total trading capital on any one trade. 
  6. Holding positions that are diversified and not highly correlated can lower your total open risk. 
  7. Trading liquid markets can lower your risk of being trapped in a trade you can’t get out of when you want to. Liquidity is the most important fundamental. Penny stocks and out-of-the money options can present liquidity risks for retail traders. 
  8. Never trade so big that your ego and emotions become so loud you can’t hear your own trading plan.
  9. Trade smaller and smaller during losing streaks in both position sizing and amount of open positions. 
  10. Manage your drawdown in capital carefully do not let it lead to mental ruin as a trader. You can come back from lost capital but you can’t come back from losing your nerve.