Generally speaking, traders fall into two camps.

In the first camp, you have those that are always counting their money before they’ve made it.

In the other camp, you have traders calculating how much they have to lose before they think of the potential rewards.

Now I can tell you I fall firmly into the second camp. But it wasn’t always like that.

When I first started trading, I was all about figuring out how many trades it would take before I made my first million dollars.

The problem with this type of thinking is that you’ve already assumed a perfect outcome. In other words, your expectations start sky high.

Anyone with any experience in the markets at all knows that with trading, you rarely get a picture-perfect outcome.

So, if you’ve started to count your money before you’ve even made any, things can’t get better. They can only get worse.

Protecting the Downside Comes First

Before you’ve even placed a trade, you’ve already stacked the deck against you.

When you’re picturing all the money you’re about to make, you neglect to think about what to do if the trade doesn’t go according to plan.

And sure enough, many of my trades didn’t result in a perfect outcome. All because I was holding out for the home runs that would make me rich overnight.

The funny thing is that today, many of my trades still don’t result in a perfect outcome. The difference is that I’ve learned to make money from imperfect markets.

Instead of always swinging for the fences and holding out for that one huge winner, I’ve learned to take smaller wins more consistently.

It’s always fun when you’ve spotted a trade with huge potential. But it’s irresponsible to ignore the risks that come with that potential.

No trade is a sure thing. There’s always some element of the unknown that could trip you up and cause you to lose your money.

That’s why my first responsibility as a trader isn’t to make money. It’s to protect my downside.

You can’t make money as a trader without having some money to trade with. If you lose your trading capital, then you’re out of business.

It’s as simple as that.

My Favorite Risk Management Strategy

That’s why one my favorite risk management strategies is to engineer my trades in such a way where I end up with nothing to lose as soon as possible.

I do this typically by either trailing my stop loss to the entry point of my trade (accounting for things like the spread and commissions) or by taking partial profits on my existing positions.

Either way, the faster I can get to a position where if the trade goes against me, but I have nothing to lose, the better.

This way I have everything to gain in the event the trade works out… but very little, if anything, to lose if it doesn’t.

I know that’s not exciting, but it’s reliable. And over the years this strategy has served me extremely well.

After all, if I wanted excitement, I’d just head over to an actual casino. That sounds like a much better time than sitting in front of my computer screens all on my own.

Happy trading,

Imre Gams
Analyst, Market Minute