Thursday, May 08, 2008

Risk management and psychology.

I have made the mistake in the past of trading too big a size on each position in relation to my trading equity. Despite reading a lot of the material on risk/money management, I was too stubborn for too long, the end result being the occasional severe drawdown.

I now have rigid risk controls in place. In my case, I risk only 2% of my trading capital on opening a new trade.

A by product of trading too 'large' a position is that you can become over-anxious to take profits on a trade, even though a stock may retrace on a normal pullback before resuming it's main trend. This has happened to me more than once, resulting in missing out on significant profits.

As a result of my experiences, (for me) position size and money management are the cornerstones of my trading rules. I would even go so far that these are more important than the entry/exits rules of my trading plan.

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