Food for Thought - 027 - Risk Management

Primary job of traders is Risk-management all the time. Reward-management for these risk-managers is solely market's job. In other words,

1. Limit your losses (define risk per trade and know the worst case).

2. Don't limit your profits (let the market itself decide your reward).

(Interestingly, i am yet to see any trading system/plan which can beat even trading costs for a couple of years by violating any of the above two rules of trading. Both rules are powerful just because markets are powerful wild beasts, Bulls & Bears. If you don't incorporate rule-1 in your trading plan, your account is bound to vaporize eventually. If you incorporate rule-2 then only you can catch big profits which are backbone of final result. Illustration: If a trader does 100 trades four outcomes are possible. (1) Small profits, (2) Small losses, (3) Big profits and (4) Big losses. Now if the trader can control big losses then he will be automatically a winner as small losses will get neutralized by small profits and big profits will dominate overall result. -- Kamlesh Uttam