The importance of proper risk management in trading
Here is a GOOD example:
There are two traders, John and Sally.
They both start with a $1,000 account.
John is an aggressive trader, and he risks $250 on each trade.
Sally is a conservative trader, and she risks $20 on each trade.
Both adopt a trading strategy that wins 50% of the time with an average of 1:2 risk-to-reward.
Over the next 8 trades, the outcomes are "Lose Lose Lose Lose Win Win Win Win".
Here’s the outcome for John:
-$250 -$250 -$250 -$250 = BLOW UP
Here’s the outcome for Sally:
-$20 -$20 -$20 -$20 +$40 +$40 +$40 +$40 = +$80
Do you see the POWER of risk management?
So here’s the deal:
As a trader, you’ll encounter losses regularly.
But with proper risk management, you can limit these losses until it feels like an “ant bite.”.