The most important trading tool
BY Chris Andreou|February 2, 2021
What is the most important trading tool a trader can have? There are many candidates for this nomination but I believe that one specific tool available in traders’ toolboxes is well above all the others. Actually, I would venture to say that it is so essential that all the other tools are useless without it. No, it’s not an indicator or some fancy market timing signal system. This tool is called: Risk Management. Not a very sexy choice for this nomination most traders might say. This might be true but it is also true that most traders lose money! What differentiates big traders from the rest of the crowd is this one tool and the effective and disciplined use of it. Every highly successful trader I have ever read about or listened to their interviews emphasizes the significance of good money management. It is a vital ingredient in their success stories. If this is true for the best traders in the world, why would it not apply to you and me?
Some of the best traders have been constantly making over 300% per year, and the work they put into achieving this is centered around managing risks. The analysis and the research and the preparation they routinely engage is important but all this is meaningless without highly disciplined risk management. It ensures they are out from their trades when prices are likely to move against their positions but it also helps them to keep their psychology right for high-performance trading.
Risk management is vital to ensure that your trading strategy can have a positive expectancy. This term refers to the fact that after say 100 trades your total winnings tend to be bigger than the total of losses and trading costs combined. Without risk management achieving this on a constant basis is impossible.
Every experienced trader knows that strategies that only win, i.e. strategies with 100% success rate exist only in scammers’ promises when they sell their services that are supposed to make you richer than Jeff Bezos. And, all this without any losing trades and no work from your side. Just pay the money (to the scammer) and you are set for life. In real life, all strategies have losing trades and not only losing trades but periods during which each strategy loses money. These periods are called drawdowns and wise traders accept them as part of their trading business.
Everyone intends to buy low and sell high but sometimes the market turns south just after we open a trade and moves to our stop. And this can sometimes happen X number of times in a row. If your strategy is really good there will be only some occasions during which a series of losing trades take place. Say for instance that your strategy has a tendency to start recovering after a maximum of 3 to 5 losing trades. This is awesome but risk management is still needed. It is there to ensure your account takes only a moderate hit during this period and safeguards your account. This is why we use stops and never bet too much. After good planning and historical backtesting, you know how much to risk per trade (and per day) you can take and still avoid drawdowns that would be psychologically too uncomfortable. If you feel unsure about developing your strategy and have questions you would like to ask about risk management come to my next free webinar. I am more than happy to teach you!
TIOmarkets is committed to helping you to learn and develop yourself as a trader. This is why we have free webinars and other education material at TIOmarkets.com/analysis. Go to TIOmarkets.com/webinars to register for our next Live Trading Strategy Workshop for free. I will be there to teach you and share from my 20+ years of experience in markets and trading. Also, if you haven’t yet done so open a VIP account with TIOmarkets. Go to https://tio.tiomarkets.com to register and you will get tight spreads with no trading fees.
Chief Market Analyst
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