Incorporating Risk Management

By Author: Markus Heitkoetter
Total Articles: 11
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You may have a risk management plan, and risk management tools, but do you actually know how to incorporate your risk management into your trading? There are several good techniques for incorporating your risk management strategies. By studying these techniques you will be able to decide which techniques will be right for you, and your trading plan, based on your goals, trading experience, and emotions.
There are many ways a trader can incorporate risk management techniques into their trading. As a veteran trader, I firmly believe all traders should have some risk management techniques applied to their trading. But it is important to understand the best ways to incorporate these techniques once you have time. In this article I want to talk about what I think are the three best ways to incorporate risk management strategies into any trading technique.
The first technique I suggest to traders is to use bracket orders. A bracket order is an order than can be attached to your entry order, and will allow you to set a stop loss and a profit target. For example, a trader who trades the E-mini S&P 500 might have ...
... a three point profit target and a two point stop. If this trader sets a bracket order when entering a trade, the stop and target will automatically be in the market, waiting to trigger once the order is filled. Some brokers do not allow bracket orders. If you know that your broker does not allow bracket orders you may want to think about changing brokers. Bracket orders are great for all traders, and are especially good for short term traders.
Another way to implement risk management is to set a daily loss. A daily loss is simply a number you set for yourself that tells you when to get out of the market. It can be any number that is suitable for your account, trading plan, and emotions. It can be $200, $500, $1,000, whatever you'd like it to be. However, once the daily loss is met you must stop trading and evaluate what went wrong. This method might not be appropriate for all traders, but it can be a good way to keep your emotions from getting the best of your trading.
The final way I suggest traders implement risk management is through broker involvement. Many brokers will let their clients set catastrophic stop losses on their accounts. This catastrophic loss levels, much like a daily loss level, will completely depend on the trader, their account, and their trading plan. A trader who sets a $1000 catastrophic loss for themselves know that their normal losses are much less than $1000. They also know that
if they reach the $1000 loss then something must have gone horribly wrong in their trading. Obviously, it is never good to experience this kind of loss,but setting a catastrophic loss stop will keep you from incurring a much greater loss.

There are many ways to incorporate risk management into your daily trading routine. Risk management should be implemented to protect your account, and yourself by reducing the potential risk you might experience as a trader. These are three of the best ways I believe any trader can incorporate risk management.
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