Day Trading – Don't Lose Your Trade Capital!

Novice day traders have little idea how to manage their trading risk,
even as a concept. The typical pattern is that they put on a
trade based upon some fairly poorly defined criteria, and when
the market eventually moves against them, they are clueless as to
when to get out of the position. Instead, they will typically let
the trade worsen until it is eventually too painful to retain.

The experienced trader, however, places risk management at the
heart of the entire trading plan from the very beginning. If you
realize that in this profession, the goal is not just to make
money, but also to make sure that you do not lose the money
you’ve got, then you have made great progress… before you have
even placed your next trade!

Put more graphically, if you were to lose, for example, half of
your trading capital, the the consequence is that you have a huge
uphill task ahead. You will actually have to achieve a fully 100%
return, just to break even, i.e. to get back to your starting
capital! Worse still, you must do even better than a 100% return
to actually go into profit. If you realize that extremely few of
the best hedge fund managers make 100% return on capital in a
year (never mind all the other more mediocre players out there),
you will realize what an truly monumental task this really is.

Yet, ask a few beginner traders and you will find that it is
actually very easy to lose half your trading capital quite
rapidly. You do this just by placing too large a trading position
in the first place; namely betting on ill-defined trading
opportunities where your chances of winning are low, and then
staying in the position for far too long when it is clear that it
has already gone against you and is not coming back anytime soon.

You can read the full online trading article about economists and listen to the trading mp3 podcast there too.