Wednesday, June 18, 2014

The One True Golden Rule of Stock Trading: Smart Risk Management

I became a successful stock trader once I focused on managing risk instead of a stock picking.  Risk management is the golden rule of stock trading.  As George Soros said, "It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you're wrong." 

I took these words to heart.  I will not trade a stock unless I have a  2:1 risk ratio.  What this means is if I risk one dollar, I must have a reward of at least two dollars or I do not take the trade.  In other words, if I buy a stock at $100, and my stop is at $98, my target must be at least $104.  

My trade results back the benefit of smart risk management.  Members of my nightly Trade Report receive an alert every time I enter or exit a trade.  Since the Report started on May 13, I have made 14 trades.  My win rate is exactly 50 percent.  You would expect that I am breaking even, right?  Wrong. I am up $7,543 in just over a month (and that does not include the +$4000 YELP trade, which I am still holding).  My average win is +$1628 while my average loss is only -550. I am getting 3:1 on my trades.  

How did I get these results?  By having a plan before entering the trade and making sure I always have at least a 2:1 risk ratio before entering a trade.  It's all about risk management, the one true golden rule.




What is your Golden Rule?  I want you to share in the comments below.  

If you would like to learn more about how I trade, receive my nightly focus list with market analysis, setups and trade alerts, sign up for a 7 day free trial at BullsonWallStreet.com.  

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2 comments:

Craig C said...

Always trying to stick to 2:1 or better is my rule. Tough part is setting to close of a Stop and getting Stopped out only to have the trade turn around in a few days.

Mike said...

Nice tips and also very detailed information.I am totally agree with you that today its really impossible to invest money in share market without demat account.It is the best way to invest your money securely in share market.
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