Merriam Webster’s dictionary defines risk as possibility of loss or injury or in regards to the stock market, the chance an investment, such as a stock or commodity will lose value. Risk is an unavoidable factor in life, and there is very little we can do to remove it; however, we can take very actionable steps to reduce it.
For example, we face risk driving to work each day. When we leave our house in the morning, there is an inherent risk being on the open road. However, we can learn to do things which will mitigate our chances of something bad happening. We can wear a seat belt, and we can learn to drive defensively. Both of these examples will help to reduce the risk of something happening to us, or if something bad does happening, wearing a seat belt can help mitigate the damage which is done. This concept or philosophy of managing your risk is a tentpole principle at TradeSmart and one beneficial to both new and seasoned traders.
When it comes to managing your risk in the stock market, one of the simplest steps we can take is implementing a trade management plan. A plan of action steps which we will follow step by step on all of our trades. Here is where the All or Nothing Plan shines as it is a simple and effective plan for both new and old traders. And just as wearing your seatbelt is an easy step to limiting risk on the open road, using the All or Nothing Plan when trading is just as straightforward and efficient. By following the AoN plan we can enter a trade and forget about it. The trade is set up so we can go on with our lives and let it play out without hovering over the market feeds. The AoN plan works with any time frame from day trading to weeks or even months. Lastly, the All or Nothing plan only requires a few easy steps on our part to gain all of the possible benefits.
The first step to using this plan is identifying our trade, which means we need to know the entry, the stop, and the target for the trade we want to execute. The next step is entering the trade when the price triggers. For example, we want to enter a trade on XYZ stock at 20 dollars a share. We set our stop at 19 dollars a share and our target at 24 dollars. With everything set up in advance, we will automatically enter this trade when XYZ moves to 20 dollars a share. Next, we set out stop market order at 19 dollars a share. So, if the market moves bearish and drops to 19 dollars, we are immediately exited out of the trade with only a minor loss of capital, which protects us from incurring a huge loss when we are away from the trade and our computers. Finally, we need to set our limit at our target price. When XYZ moves up to 24 dollars a share, we exit the trade and take our profits. The AoN plan is a simple, clean, and effective plan which will get the job done trade after trade.
By doing these steps repeatedly on our trades, we can test the profitability of our current trading strategy and provide serious capital loss protection at the same time. Plus, if we are tracking our trades in a trading journal, which we strongly recommend, the data a trading journal will provide is a proven metric to our current trading strategy success rate. Finally, we can set our trades and walk away from them, which removes almost all human emotion from the trade which in turns provides us more free time away from our computers. The All or Nothing plan will change the way you look at trading and provide a solid foundation for growth and profit.
We have only touched the tip of the iceberg when it comes to managing risk while trading. If you wish to learn more, consider joining us in our next Risky Business class, where we layout the All or Nothing plan and provide even more solid steps to protecting your financial assets in the market.