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In part one of this three-part Prep–Trade–Reflect™ series, we talked about the importance of preparing for the trading day. Today, we’re going to shift gears and get into risk management and trade management.
Learning to control your emotions and holding yourself accountable are vital components to effectively managing your trading account, and it’s all rooted in how well prepared you are. Much of what this article covers is directly related to the “Prep” article, so if you haven’t read it yet, we recommend that you take a look.
Let’s get started…
What I’m about to say might be a difficult concept for many people to understand or accept, but in this day and age, we are not just traders anymore; we are all risk managers. As Coach Hoag says, “money is easy to make, easy to lose, and very difficult to keep.” If you have trouble managing your money, then making more of it really won’t help you in the long run.
Try to think about it this way, your job as a trader is not to make money; your job is to make good trades. When you consistently make good trades, then the money will eventually follow. And, the better you manage that money, the more you will see it grow.
The basic tenets of risk management are simple; increase profits and decrease losses. We accomplish this by hypothesizing optimal trade locations for the least amount of risk possible. You enter a trade at a reliable point of validation with a high probability of success and exit at a point of invalidation.
An important factor to consider when entering a trade is maintaining a minimum reward-to-risk ratio of 2:1. This is why you hear the Topstep coaches constantly saying that you should know where you’re getting out before you get in. Suppose the minimum profit target for the trade you’re considering does not exceed the maximum risk potential by at least 2-to1. In that case, you may want to consider holding out for a better opportunity.
Once you’re in a trade, managing your exit strategy becomes the next task. Be aware of the market environment you’re trading in; it will save you a headache when determining whether to move a stop or even exiting the trade before the profit target is met.
If the market is trending sideways, is it better to play the range or hold for a breakout? If you’re long and the market is trending higher, is it a good idea to adjust your stop to a new point of invalidation and lock in profits? These are important questions, and there are no right or wrong answers. It all depends on your appetite for risk.
Everything mentioned above should not be attempted “on the fly.” Your risk and trade management strategies should already be a part of your overall trading plan. And remember, your trading plan doesn’t need to be overly complicated; the important thing is that you stick to it. The TraderIQ Trading Plan feature in the Topstep dashboard is an excellent tool to help you stay focused on your plan. Following your own rules can help to remove impulse and emotion and bring consistency to your trading.
Remember to keep your expectations in line with your account size. Not every trade will be a winner and not every winner will be a home run, so trade what you have, not what you want to have.
In 2020, the average hedge fund return was somewhere in the neighborhood of 7%. On the high end, the best fund managers in the world realized around 25% in profits for the year. With that in mind, do you think it’s realistic to assume you’re going to turn a $5K account into a million dollars in one year?
If all of this sounds a bit overwhelming, not to worry, Coach T is here to help. We’ve taken the time to develop a new alerts system to guide you through the Trading Combine® and help you in your Funded Account®.
Coach T is designed to motivate you. We’re going to offer encouragement when you follow your trading plan and support you when you’re having a bad day. And the best part is, you’ll be able to set up notifications for permitted trading times and economic releases to avoid a rule break.
Our job is to help you find success far beyond that first winning trade. We want to see you continue to improve on your strategies, increase your knowledge of the markets, and grow as a trader. Success does not happen overnight, and we all know there are no shortcuts in trading. Do the work; Coach T’s got your back.
Trade Well!
