Click here to get a PDF of this post

The trader that rejects risk management and thinks they do not need it discover sooner or later that they did. A trader can be successful for periods of time ignoring their risk exposure and their probabilities of the risk of eventual ruin. However they learn that they were just mortal and the trading gods will eventually take back all the profits that were stolen from the markets without a good plan to keep them. Victor Niederhoffer, Amaranth, LTCM and many other learned the hard way that you can not out smart the risk of ruin if you are not mathematically prepared to survive, trading  too big and exposing yourself to too much risk will result sooner or later in ruin when the unexpected event comes around that destroys all that you have built.

  1. When you keep a set smaller position size it keeps down the volume of your emotions.
  2. If you never lose more than 1% on any one trade each trade is only one of the next 100.
  3. Knowing when you will get out of a trade when you get in will keep down your stress levels. You have a fixed risk amount instead of an open ended one.
  4. If you manage your risk of ruin then you increase your odds of success by at least staying in the game and not blowing out your account.
  5. Managing risk enables a trader to keep the profits that they have earned and avoid just giving them all back with a string of big losses.
  6. Risk management allows a trader to have big wins and small losses and removes huge losses as a possibility.
  7. Risk management and keep you safe from the “black swan” and “fat tail” events that blow up trades in one day.
  8. Risk management can enable your trading account to survive from a big draw down due to a series of losses.
  9. Smaller position sizes allow the trader to give a trade more room to fluctuate before hitting a stop.
  10. Risk management allows a trader to be wrong and stay in the trading game even if they are wrong many times they get to keep playing . No risk management ends their game eventually and permanently in most cases due to mental ruin to compound the financial aspect of it.