Trading Risk Management: Rules & Techniques for Traders

Without proper trading risk management, your next trade could be your last! But too many day traders don’t understand just how crucial it is. 

We talk about risk management a lot, but we don’t always go deep on this topic. Let’s fix that now. 

True, it’s not exciting like hot stock picks, but it’s critical to your trading success. Without it, you can lose all your hard-earned money in a single trade.

Yep. I’ve seen it happen … Hot traders can become toast in a single bad trade.

Even I had to learn what not to do the hard way. The fact is that all successful traders use smart risk management that fits their strategies.

So what is trading risk management and why is it so important?

Why Is Trading Risk Management Important

Risk management is the most important skill for successful traders. The saying is true … “There are old traders and there are bold traders, but there are no old, bold traders.” 

In essence, if you trade like a gunslinger, you won’t be around very long…

So how can we become “old traders” and stay in the markets well into our golden years? First, let’s look at the basics…

What Is Risk Management in Trading?

Risk management is the specific actions you take to protect your trading account from losses. The less money you lose in your first few years, the longer you can stay in the game. And that means more time to work at finding consistency.

Your months and years of experience can add up. And over time, you can better learn to intelligently weigh the risk/reward of every single trade.

How Trading Risk Management Works

From a high-level view, here’s how trading risk management works … If you take care of your downside, your upside can take care of itself. Sounds counterintuitive? Hear me out…

The Psychology of Risk Management 

When losses add up, it can affect you psychologically and mess with your head. That can further your losses if you’re not careful. Frustration can cause you to break discipline. 

Your mindset can sway your performance more than your strategies and rules. That’s why it’s smart to take a break after losses. Avoid spiraling losses and revenge trading.

Focus on minimizing your losses instead of maximizing your profits.

Consistently small and manageable losses can help you have a better sense of control. You tend to be more disciplined when you don’t have big losses.

And when you’re on a winning streak, remember to stay humble and disciplined. Greed can lead to overtrading the same way fear can.

How to Manage Risk in Trading Penny Stocks

Trading risk management is a critical ingredient for traders who want to be successful over the long haul. Not having risk management is like cooking pizza for too long — you’ll burn your dough!

#1 Set the Right Expectations

When you first discover trading, you might think one hot pick is all it takes…

But you gotta know it takes a lot of hard work, effort, and experience. It takes years to become a consistent trader. I don’t want it to sound like it’s all terrible. The thrill of the markets is like nothing else. But set solid expectations and trading plans.

Learn the foundations of stock trading first. Think of it like any high-paying risky profession … You gotta learn in a safe environment before you’re exposed to on-the-job dangers.

With the right education, you can work to meet your goals over time. That’s what we offer in the SteadyTrade Team mentorship community — twice daily webinars and guidance from veteran traders to help you find your way. Join us!

#2 Don’t Quit Your Day Job

New to the markets? Don’t ditch your job or trade money you can’t afford to lose.

It’s important to not need to make money from trading when you’re learning to trade. Never use money you need for rent or bills. That’s a sure way to overtrade and blow up your account. Keep your day-to-day financials on solid footing for a grounded mindset.

Remember, most traders lose. Only trade with money you’re OK with losing.

#3 Find The Right Strategy … For You

You’ll have to try many different strategies. But make sure to refine one setup.

It’s easier to specialize in one strategy and wait for the perfect setup. Define it. Narrow down its criteria and write it all down.

If you’re trading lots of setups, chances are you won’t be very good at any of them. That’s risky.

I like going long. I’ve seen too many shorts blow up. But Michael “Huddie” Hudson grew his account by shorting when he started. These days, he buys more. That’s because there are so many short squeezes. Check out how I like to take advantage of them with my dip and rip setup:

#4 Paper Trade

Once you’ve found a strategy, paper trade to gain screen time. There’s zero risk!

This way you can see how stocks move and test different strategies to see which ones work for you.

#5 Think Like a Pro

Remember, this can be a career. So treat it like one. But remember to find a balance in your life. Don’t let trading consume you.

My first years of trading were a grind. It took long hours of planning and reviewing trades in my old beat-up journal. It helped me get to where I am today. And it set up good habits that serve me today. Even now, I stick to a steady schedule.

So wake up before the opening bell. Have a trading plan and watchlist prepared.

It wasn’t until I made the same mistakes countless times that it finally clicked. Even if you’re as stubborn as I am, you’ll eventually get tired of failing and start avoiding those same mistakes.

#6 Plan, Journal, and Review

It’s important to plan your trades. Run your scanner. Check the Breaking News Chat tool on the StocksToTrade platform for news. See if any stocks match your criteria. Watch a few stocks, but only trade if they meet your setup and plan.

After the trade, see how it worked out. What did you do right? What can you do better next time? 

Constant refinement is what it takes to improve your results. Remember: if you fail to plan, you plan to fail!

#7 Don’t Set Profit Targets

When you’re on a hot streak, you might be tempted to project your results or set daily profit targets…

Here’s the thing. You’re at the mercy of the markets. If there’s no play this week, you have to be OK with that.

If you wanna hit a profit target, you’ll push for setups that aren’t there. You can start trading poorly, taking unnecessary risks and losses.

Instead, focus on following your rules and plans.

#8 Accept Slow Periods

Sometimes, there just isn’t a trade.

We saw OTCs go quiet for almost a year before roaring back this summer!

Sometimes strategies stop working for months at a time. You gotta back off. Don’t force trades where there aren’t any.

#9 No FOMO

It’s OK to miss a trade. There are always more! Every trader misses trades sometimes.

It’s better to miss a trade than to overtrade. So don’t chase. Let it go and prepare for next time.

#10 Embrace Trading Setbacks

In your first few years, you can have successful streaks, then feel like nothing’s going your way.

That’s the time to take a break, review your trades, and study.

It’s easy to get frustrated in the heat of the moment. That’s when you might break your risk management rules — like doubling down or not cutting losses…

Learn from your mistakes and don’t overtrade to try to recoup losses.

3 Rules of Day Trading Risk Management

Taking losses is uncomfortable, so we tend to hold them. And we don’t want winners to turn against us, so we lock ‘em in quickly. This can lead to losses outweighing winners.

This is where trading risk management is key: you have to learn to cut losses quickly and let winners run.

1. Set Your Stop FIRST

Any trade can go against you, no matter how ideal. So expect the unexpected.

Cut losses quickly. If you wanna be in this for the long haul, you gotta do it. Set a stop and stick to it!

Don’t use a set stop percentage on each trade (like placing your stop 3% away from your entry on each trade). Each stock and setup is different, which can invalidate your trade thesis.

And when it’s time to take a loss, realize it’s a necessary part of trading.

2. Take a Proper Position Size

How large will your position be? Are you going all in?

That’s a bad idea. Your risk will be different each time. And if the trade goes against you, it can destroy your account!

New traders are usually too aggressive. They haven’t experienced the dangers of the markets.

When you start off, you can have a fixed position size. For example, your position size is $100 for each trade.

This is great at the beginning. But you may want to move on to risk-based position sizing. This means you risk the same percentage each time. When you lose, you’ll lose the same percentage of your account.

When you start day trading, stick to a small risk, like 1% or less of your account. That can potentially help you stay in the markets longer.

Position Size Calculator 

Number of Shares = Account Value x Percentage Risk / (Entry Price – Stop Price)

Position Size = Number of Shares x Entry Price 

Enter your stop price, entry price, percentage risk, and account value to find your risk-based position size.

3. Modulate Risk

You have to modulate risk! In a cooler market, you might risk 0.5% a trade. Setups won’t be as predictable, so you need smaller sizes. Similarly, in a hot market, you might increase your risk to 2% … but only if you’re ready.

Some traders risk less when the opportunity isn’t there and more when the odds are in their favor. Remember that…

The goal is to protect your downside. Doing so can have good financial and psychological effects. Remember those small wins can add up as long as your managing your losses well.

How StocksToTrade Can Help You With Risk Management

While StocksToTrade won’t manage your risk, it can help you find the best opportunities for your strategy. StocksToTrade has 40+ built-in scans designed by dedicated traders. Using great trading tools can help you find those smart trades.

And check out the Breaking News chat room. Our team of stock market pros filter through only the most relevant trading news for you. And if you need help keeping an eye on hot movers, Oracle Daily Direction Alerts can help you find perspective.

Add StocksToTrade to your daily trading plan — get your 14-day trial for just $7!

Conclusion

Now if all these risk management techniques seem overwhelming, that’s because there’s a lot to consider.

This is a tough business that will humble you. But by implementing the trading risk management tips above, you can work to stay in the game longer!

A simple way to gain experience is under the mentorship of veteran traders. With the SteadyTrade Team, you work under the professional guidance of Huddie, me, and trading coach Kim Ann Curtin. 

So join me and an amazing group of traders at SteadyTrade Team now! 

And every day, you can join me on Instagram for premarket and noon live sessions. I’ll give you my in-depth market commentary on what’s hot and what’s moving stocks. It’s a great way to get some insight during your trading day!

Risk management is crucial at every stage of trading. Learn it early and continue to work at it.

How do you use risk management in your trades? Leave a comment below and tell me what you think!