Risk management is essential to profitable trading. No matter how good your trading strategy is you're going to experience losses. As Forex traders, we know that we don't need to fear taking a loss. However, if you don't manage a losing trade then you're going to find yourself in trouble pretty quickly.If you are a baseball fan, then you've probably witnessed some terrific double plays. As spectacular as these plays are, there will be times when you'll notice the fielders don't go for both outs. This is an example of risk management.
There are two types of risk regarding a double play: the risk to the fielder, and to the play.
Managing Risk to the Fielder:
The baserunner is going to want to do anything he can to break up the play, even if it sometimes poses a risk to the base man. We've seen some pretty serious injuries occur due to a collision between runner and infielder. Obviously, the base man doesn't want to be injured, so why would he still go for the play? There are some basic safety steps the baseman can take to reduce his risk of injury like slightly bending and turning his knee towards his target or jumping the base runner as soon as he completes the throw.
When trading, sometimes we don't go for the best play because we're afraid of the risk. True, you're going to take a hit sometimes, but just like a baseman can adjust his stance to allow him more support a trader can use stop losses and market analysis to secure a solid trading plan that will minimize risk.
Managing Risk to the Play:
Not every play needs to be an extraordinary play; in fact, even if you only have a couple extraordinary plays, consistently executing good plays through out the game will result in a win. Often times there isn't time or room for mistakes; two runners on base are exponentially more dangerous than one. So, what do they do? They throw straight to first base to get the sure out! Just as the fielders sometimes have to bite the bullet to ensure they get the out, we as traders have to get used to taking hits before we find good market positions.
At the Apiary Fund, we put a large emphasis on consistent profits. While it would be nice to believe you’re going to generate profits on every trade, the reality is that you won’t. Sometimes you lose trades and runners advance, but if you remember the fundamentals of risk management, you’ll be a profitable trader. Small losses (a single runner) are much easier to overcome than large ones (two runners). Make it a habit to minimize the damage of the losing trades that will inevitably come and you'll find your trading plan, or play, becomes much more enjoyable to execute.
Just remember this simple formula: Big Winners + Small Losers = Profitable Trading