should trade small when losing and avoid amplifying their losses.
Will you limit your risk exposure?
Risking a 1% loss on any one trade is a
great way to begin your risk
management planning, but you also must consider how many trades you have at
any
one time, as well as their correlations to each other.
- How many entry signals can you take before you can’t add any more risk?
- When should you stop taking new entry signals?
- Will you only expose your trading capital to three trades at any one time?
- Will you limit your total risk exposure to three at a time if the trades are
correlated positions, like three tech stocks?
- Would you expand to five total positions if they are
not closely correlated like
trades in oil, gold, the U.S. Dollar, the S&P 500, and a tech stock?
You amplify your risk when you have multiple positions in the same sector or all
in stocks. You can diversify your risk if you are in different markets like bonds,
metals, energy,
currencies, and agricultural commodities that generally don’t
move in the same direction at the same time. Study your markets and decide on
the appropriate risk based on current correlations. Understand that correlations
can change over time and during different market conditions.
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