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Risk - How to apply it correctly

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Risk..... say it with me again..... RISK..... what makes this the biggest factor in an Investors chosen path i hear you ask? 

This weeks blog will answer in detail - exactly why having sound risk management is 1 of the fundamental tools that every single successful trader on the planet will adopt to ensure longevity.

Oftentimes when I take a client on - especially a Swing / Day Trader - I will attempt to understand their mindset and their attitude to risk - and what I usually find - is my client will have a bit of reckless abandon and will oftentimes go "all in" on a Trade in the hope of making BIG money - or they will position size WAYYYY more than they should, and it is not uncommon for me to hear - Sam, I went in on (choose a random stock) and lost $10k on a $30k Account..... i hear this far too often.... and the reason I hear it a lot is because position sizing and risk management has not been explained or is not understood by my client. The cycle is vicious - as once trapped in a hurricane - it is oftentimes too difficult to get out, and it is only a matter of time before the Account is blown and the Investor / Trader gives up.

It is at this point that I would like to recommend a good read - "The Complete Turtle Trader" by Michael W Covel - the reason why this book is important - is that the Turtle Traders (as they are now known) - were legends on Wall Street - and the unbelievable thing about it - none of them had a back ground in investments or the Stock Market - they simply responded to a small job advert in the newspaper without knowing that the role would effectively be an apprenticeship with a Wall Street god Richard Dennis - and the only thing Richard Dennis taught them.... Rules and Risk Management - these 2 simple tools - turned the Turtle Traders into gods in their own right.

As an example - If we think about an Investor with a $100k account, and in year 1 he loses $50k......... in year 2 - for the investor to BREAK EVEN - he has to make a 100% return the following year - think about that for a second and really think about that - he has to return 100% in year 2, despite only losing 50% in year 1. The importance of Risk Management should not be under stated. It is critical.

The most successful Traders on the planet understand this, and the mentality should always be that slow and steady wins the race and ensures a long career.... by not adhering to risk management and position sizing.... you will likely fail..... and fail quickly.

The correct protocol - is to adopt a strategy where you only risk 1-2% of your Capital on any 1 Trade. This applies to Share Dealing / Spread Betting and CFD Trading. The 1-2% risk should be your template ALWAYS..... and if you are picking the correct stocks for a MID / LONG TERM Trend - you should (in theory) see profits far out-weigh losses.

There is a very specific formula that should be used which is something that I teach within my course - and this encompasses Position Sizing - and like I said previously - it is CRITICAL.

Without a sound understanding of Risk - you are facing a battle to run up Everest in shorts and t-shirt - this will never end well - unless your name is Wim Hof (google him - fascinating guy). 

If you’re interested in education and you struggle with your trading results… we’d love to hear from you.

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Sam McCallumComment