Trading News
Nov. 7, 20225 min read

The ultimate risk management guide

Tim BohenAvatar
Written by Tim Bohen

One of the biggest struggles traders constantly face is risk management.

Done incorrectly, one bad trade can wipe out days, weeks, or even months’ worth of gains.

Not to mention, the psychological damage it does.

You could be using the right risk levels on the chart (or if you use Oracle you have the help of an algorithm…) 

But none of that matters if you’re losing too much when you cut losses. And your wins don’t make up for them. 

Your account will just die a slow death by a thousand papercuts…

Nobody wants that.

So there’s an important balance you have to find … You need to keep your losses smaller than your wins so that in the end you make progress. You want to see your profit chart to go in an uptrend, not down… 

But risk management isn’t a one size fits all strategy. So here are a few different ways you can calculate your risk depending on your account size. 

Risk Management 

There are many things to consider when developing a risk management strategy

You need to know where to cut losses on the chart. But you also have to calculate your position size and how much you’ll lose before you even take a trade. 

That’s why I’m glad I got asked about what I think is a good max risk per trade in my morning SteadyTrade Team webinar…

It’s an important part of a trading plan that many traders don’t put enough emphasis on.  

So here are my tips… 

And don’t worry if it sounds complicated …it will get easier with more experience. Then as you scale up, you can adjust the numbers… 

Large to Medium Account Size 

If you’ve grown your small account to a medium or large size, maybe you already have a risk management system that works for you. 

But if you’re starting out with a fair-sized account, don’t mistakenly think that risk management isn’t that important. (See how even great traders like Tim Grittani can struggle with risk management here.) 

It’s just as easy to blow up a large account as it is to blow up a small one. Especially if you don’t have rules, keep taking losses, take too big of losses, and bag-hold losers. 

But with a large account, you have a bit more room to play around with different strategies to see what works best for you… 

You can risk a percentage of your account per trade or per day. Or you can have a set dollar risk per day or per trade. 

And if you’re experienced, you can adjust how much you’re willing to risk depending on the setup you’re trading and whether your data shows you it’s a high-odds setup

If you’re still trying to figure out the best risk management for your larger account, google a position size calculator. Then play around with the numbers until you see something you like. 

I specialize in teaching traders how to grow a small account. So here’s my methodology for those starting out… 

Small Account

If you have a small account, using the right risk management strategy is even more important. Because you don’t have as much leeway with losses before your account is gone. 

I consider anything under $5,00 to be a small account. And if you have a $2,000 account, you can’t risk 1% of your account per trade — you’ll never get ahead. 

Instead, I like to use a set risk methodology. I have an in-depth webinar on the topic on Stockstotrade University. SteadyTrade Team members can watch it here.

Basically, my methodology is to have a max dollar loss per trade. 

Then based on that amount, you can adjust your position size. This way, if the stock hits your stop, you don’t lose more than your max dollar loss. 

It’s a simple calculation but it does take time to figure it out before you jump in a trade. 

In my SteadyTrade Team webinar, I gave members a scenario using simple round numbers based on a 100-share position. 

Determine your max loss amount, then practice doing some math so it’s easier for you to calculate when a trade opportunity presents itself. 

When you have a set risk, you’ll be more comfortable knowing how much you’re going to lose if the trade goes against you. 

And you’ll know that your account can sustain the loss if you calculated it based on your winning percentage and average win amount. 

Max dollar risk will vary depending on each individual’s risk tolerance. So there’s no right or wrong answer when it comes to setting a risk that you’re comfortable with. 

If you want in-depth answers to your trading questions — join the SteadyTrade Team

Members get twice daily live webinars. Plus, access to archived webinars and strategy sessions. Swing trades are coming back, so get ready for all the opportunities by joining the Team today

Have a great day everyone. See you back here tomorrow.

Tim Bohen

Lead Trainer, StocksToTrade