Risk management isn’t just an afterthought—it’s the cornerstone of long-term success. This week we spoke to Alex, who has spent the last five to six years navigating the markets, learning through both triumphs and setbacks. Today, we want to share with you the insights I’ve gathered on risk management, a crucial aspect that often makes the difference between a successful trader and one who quickly burns out.
The Importance of Risk Management
When you think of trading, it’s easy to get caught up in the thrill of potential profits. However, without a solid risk management strategy, even the best trades can quickly turn against you. As I’ve learned, managing risk effectively is what keeps you in the game long enough to capitalize on your good ideas.
One of the biggest mistakes new traders make is the “infinity add,” where they keep adding to a losing position, hoping it will bounce back to break even. This approach is a surefire way to blow up your account. Instead, I’ve found that the most successful traders are those who know when to cut their losses early and preserve their capital for future opportunities.
Setting Profit Limits
While it’s important to set profit goals, I’ve come to realize that setting profit limits can be even more effective. Let’s say you have a daily profit goal of $500, and you’ve already made $400. Is it worth risking that $400 to try and make another $100? Probably not. By setting a profit limit, you give yourself the freedom to walk away with a win, reducing the risk of giving back your hard-earned gains on unnecessary trades.
There’s no point in trading more because every trade you take extra is more risk of you losing your profits. So I think a limit is better. So even if you have like a $1,000 limit and you made $800 on two trades or one trade, you should just call it
Don’t set two opposing positions
If I was short and hoping the position would continue to decline, but I also held a long position expecting it to rise, I found myself wanting the market to move in opposite directions. Ultimately, if the market went down, my long position would also incur losses. I realized this strategy wasn’t effective, so now I simply cut my losses and move on.
The Power of a Trading Journal
Keeping a detailed trading journal has been one of the most valuable tools in my arsenal. It doesn’t have to be complicated—just record your entries, exits, the reasons behind your trades, and your emotions at the time. Over time, patterns will emerge, showing you what works and what doesn’t. This allows you to continuously refine your strategy, correcting weaknesses and capitalizing on your strengths.
For example, if you notice that your stop losses are consistently too wide, leading to larger losses than necessary, you can adjust your approach. Similarly, if certain emotional states tend to lead to poor decision-making, you can take steps to mitigate those influences in the future.
So, having a good journal, and the journal could be as simple as like you write your entries, your exits, why you took the trade, and how much you made.
You can put plenty reasons in your journal, such as: “Oh, there’s a bounce off the 9 EMA,” “There’s a rejection,” “I saw a lot of volume coming in.”
And then you put the amount of size, and you can even go deeper like
- “What were your emotions like? How did you start off the day?”
- “Were you stressed out?” And then if you see a lot of losing trades have the same repeated thing like,
- “Oh, I had too much size,” or “My stop loss was too wide,” or “It was too small,” you use it to adjust your next trades.
- If you have a lot saying, “Oh, my stop loss is way too wide,” maybe lower the stop, make the stop loss a little smaller now.
When you experience losing streaks, call it a day
Even the best traders experience losing streaks. The key is not to let these periods derail your overall strategy. When I find myself in a losing streak, I reduce my position size significantly. If the losses continue, I might even step back from trading for a few days. This allows me to clear my head and return to the market with a fresh perspective.
If you have like two losing trades in a row, just call it a day.
It’s important to remember that not every market environment will be conducive to your trading style. Sometimes, the best move is to do nothing at all. By managing your position sizes and taking breaks when necessary, you avoid the temptation to overtrade, which often leads to even greater losses.
Avoid Over-Leveraging
Over-leveraging is another common pitfall, especially in volatile markets like cryptocurrency. To avoid this, I set strict limits on my position sizes relative to my account balance. For example, with a $2,000 account, I wouldn’t open a position larger than 0.1 to 0.15 lots. By scaling into positions gradually, I minimize the risk of a single trade wiping out a significant portion of my account.
If my account is at $2,000, I wouldn’t go beyond a 0.1 or maybe 0.15 position size. I also scale into positions gradually. For instance, if I want to short a position, I might start with 0.05 and add another 0.05 later.
The Danger of Revenge Trading
One of the most destructive habits a trader can develop is revenge trading—trying to recover losses by making increasingly risky trades. This often leads to a downward spiral where each loss fuels the next. Instead, I’ve learned to walk away after a couple of losing trades. The market will be there tomorrow, and it’s better to come back with a clear mind than to dig yourself deeper into a hole.
Final Thoughts
Risk management isn’t about avoiding losses altogether—that’s impossible. Instead, it’s about controlling those losses and ensuring that when you do take a hit, it doesn’t take you out of the game. By setting profit limits, keeping a detailed journal, managing losing streaks, avoiding over-leveraging, and steering clear of revenge trading, you can build a sustainable trading strategy that stands the test of time.
Trading is as much about protecting your capital as it is about growing it. By following these principles, you’ll give yourself the best chance to succeed in the long run. Remember, in trading, it’s not just about how much you make—it’s about how much you keep.