Lesson 3: Risk Management
Manage your risk and profits will take care of themselves!
We can never fully eliminate risk from trading — if we could, we’d all be billionaires. However, what we can do is minimize it the best we can in order to increase our chances of success. Even with a solid trading system, there’s always going to be trades that don’t go the way we hoped. It’s a fact. It’s gonna happen and the sooner you come to terms with that the better off you’ll be. Only after you’ve made peace with that fact will you understand the utter importance of Risk Management.
“Psychology is critical to successful trading — without the proper mindset, you will not prosper in your trading journey”
In my opinion, Risk Management is THE most important aspect of trading. Right now, you’re probably thinking, “Wait, hold up! If it’s the most important part of trading why is it Lesson 3??”
Because I know trading responsibly is the last thing a new trader wants to hear about but it’s something they need to know, learn, and abide by. Newbie traders are always eager to get trading and start making money; they don’t want to spend time hearing about avoiding risk because they think the bigger the risk the bigger the reward. But trading doesn’t have to be super risky to provide big rewards. Savvy traders know this. But beginners… you gotta let them make their own mistakes and then teach them how to avoid those mistakes in the future. This way they feel the sting of unmanaged risk and therefore the principles of Risk Management have a better chance of becoming ingrained habits.
It’s like telling a child a stove is hot to teach them not to touch it — people learn better when they feel the pain from a hot stove or the pain of a bad trade. It sears into you memory and forms into a reflex to avoid the discomfort you experienced before. Risk management may not be the sexiest topic when talking…