My 7-Point Plan for Managing Risk & Trade Methodology
Traders who don’t manage risk well won’t be in business very long.
If you were to ask every successful trader in the world to draft a job description for what they do, I’m certain each and every one of them would include Risk Manager. The reason is simple: Traders who don’t manage risk well won’t be in business very long.
In the world of hedge funds, there are risk managers that monitor this for you and essentially sign off on trades that fall within a certain risk tolerance. But as a trader working for myself, I don’t have this luxury.
In this post, I will share my 7-step process for managing risk. It’s neither overly profound nor complex, but I designed it under the tutelage of an ex-hedge fund trader so that it addresses two main concerns:
Staying power. In order to be a trader, I had to create the conditions that allow me to come back tomorrow and take another crack at the market. It sounds extremely obvious to say this, but I would argue that most don’t actually grasp this concept.
Profitability creation. I’ve noticed amongst my mentoring clients that they haven’t really strategized for profitability. It’s not something that comes simply by way of “hold to target”. Rather, I had to optimize conditions for profit capture in an inherently uncertain environment.
One important knock-on advantage of my process is that it aids in emotional regulation, something every trader can relate to. It prioritizes twin goals of profits and risk management, and covers topics of: Stops, position sizing, profit-taking, and risk reduction.
So let’s get into it!