trading risk management

20 Day Trading Risk Management Ideas

The ability to learn and focus on trading risk management can be just as important as learning how to day trade.

Planning with risk management in combination with using tested strategies, is how you find an edge in the market.


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What is Trading Risk Management?

Trading risk management is identifying the risks of trading and then planning ways to eliminate them or lessen their impact.

Risk management is like the safety equipment for a day trader.

You can put on every piece of safety gear, but that doesn't mean you won't get in an accident.

The idea is to lessen the frequency and severity of these accidents. You want to use every tool available to minimize losses and maximize profits.

Here are 20 ideas to help you improve your trading risk management.

1. Always Plan Trades

An excellent general rule is to know your exit before you enter a trade.

Let's face it though, anyone can put money into an account, randomly hit buy and sell, and possibly make money.

Yes, you can make money without a plan, but the key is consistency.

Trading with no real plan or risk control is not smart trading, that is when it day trading is gambling.

When you follow set rules and guidelines, you have structured an idea on how you can repeat success."Just winging it" can be fun and exciting, but it won't get you very far in the stock market.

2. Risk/ Reward Ratios and Win Rate

Risk-Reward Ratio Chart 1

This is where it just doesn’t seem to click for many traders. The risk/reward ratio is how much you are risking in a trade, compared to how much you are hoping to get. Your win ratio is, of course, how many trades you win out of all the trades you take.

The power of these ratios, when considered with your win rate is impressive to consider.

The higher your win rate, the lower your risk/reward can be.

Do you realize that you can be wrong three out four times on trades and still be profitable with the right risk/reward ratio?

Now realize that you can be right 3 out of 4 times on trades and still lose money because of bad risk/reward ratios.

Consistency with risk/ reward ratios and sticking to your planned rules can save you from blowing up your trading account.

3. Daily Limits

You shouldn’t limit yourself, right?


Well, kind of. Some find a set a daily loss limit helps reduce the chance of blowing an account on a really bad day.

This is the max amount you can lose before you stop trading for the day.

Other Limits That May Help Reduce Risk:

  • A set limit you can lose before you switch to paper trading for the day.
  • A set amount you can lose before you cut your position size in half.
  • A set limit of profit gives back before you are done for the day. An example is a 50% profit give back limit. With this limit, if you make $100, you have to stop for that day if you lose $50 of that profit.

Sometimes you just have off days or have days you shouldn’t be trading for some reason anyways. These limits can help you focus, and the reduced risk may calm you down.

4. Have a Bottom Line

In addition to limits, you should consider setting a bottom line. This is the set amount you are willing to invest and possibly lose in the stock market. A bottom line helps manage the risk of perhaps going overboard and losing an unreasonable amount. You shouldn’t invest more than you can afford to lose.

A bottom line can help in unexpected ways.

If you take a big loss or approach your bottom line, it can help you take what you're doing more seriously.

It may provide more motivation and help you apply yourself so you can stay in the game.

5. Trading Goals can be a Risk

Goals can definitely be good for motivation and direction.

For trading, however, it is good to not goals too serious.

You don’t want to allow them to influence the way you trade too much.

For example, you don’t want to get too aggressive if it’s the end of the week, and you are way behind your weekly goal.

Increasing risk in some way to meet a goal is trading based on hopes or emotions and not a real plan.

That being said, other goals like always planning and preparing for trades can be super helpful.

6. Managing Trading Emotions

trading emotion

Many traders don’t realize how much of a risk your own emotions can be.

From the fear of missing out to revenge trading, is it not uncommon for traders to let their emotions get the best of them.

So, how does one manage their emotions?

Tips For Managing Emotion While Trading:

  • Remember that there will be another trade, don’t get obsessed with one
  • Get proper rest, exercise, and try to eat before trading
  • Use a Stop-Loss and Take-Profit to eliminate emotion
  • Try not to get mad, because you might get careless
  • Learn to stick to and trust your trade plan

7. The Importance of Stop-Loss and Take-Profit

For day traders, especially, the market can move faster than you can think.

If there is a big sell-off and you didn’t have a stop-loss, you are now in a tough position.

You should sell, but you think to yourself that it might come back.

Traders get stuck babysitting losing trades with the hope that they will come back up. You waste time watching it, and there is an increased risk that it will go down as it most likely has lost its’ momentum.

Emotion and human error are the main reasons the stop-loss and take-profit are so important.

The take-profit allows you to lock in profit, and having it set gives you a better chance of exiting a trade when the price is moving fast.

These two things help you control the risk of a trade.

8. The One-Percent Rule

This is the idea that you don’t risk more than one percent of your account total in a trade.

For example, if you are trading with $1000, you would not risk over $10 per trade.

Some traders may look at this rule as too conservative, but you really should consider it. Naturally, the one-percent grows as your account grows.

So, in essence, as you get better, you are allowed to trade with more capital.

Big money traders do, in some cases, move up to two-percent instead if the one.

9. Be Accountable

Accountability is possibly the most underrated and important risk management idea. Being accountable in trading is accepting responsibility for your trades.

When you make a mistake, you need to identify it and own it so you can learn from it.

Some traders don’t study or even keep track of their trades.

When you don’t learn from past trading mistakes, there is a good chance you will make them until you do.

Studying your trades is a big part of trading accountability.

Remember to keep everything transparent and in view so you can use it to get better quickly.

10. Averaging Down Rules

Averaging down is when you already have shares of a stock, and buy more shares of a stock after the price drops.

This decreases the average price at which you bought the stock but increases your share size.

This can increase your risk greatly, but at times help you reduce or eliminate a loss.

This is something to be aware of, and make your own rules for. You need to plan for this risk because there will be many times you want to do it.

position size

11. Position Size

Position size refers to how much capital you have in a trade.

The theory is if you start small and get consistently profitable, you should have no problem increasing your position size. There are many reasons why this is not always the case.

The more money you have in a trade, the more risk you have.

When there is more risk, it usually affects the emotions a little more.

Also, as the size of your position grows, you have more shares you're trying to trade.

It might take slightly longer to buy and sell stocks as your orders do not always fill at the same price.

12. Trading Slippage

Trading slippage is any situation in where a trader receives a different price than what you planned on in an entry or exit of a trade.

It is something that can be hard to avoid. Market orders are one of the main causes of slippage.

Limit orders specify a certain price that will only allow the trade to execute at that price or a better one. Every type of order has its uses, however.

There are some cases where you need to use market orders to get in or out of a trade fast and have to settle with the price you get.

Using limit orders, when you can, will help you reduce the risk of slippage.

13. Consider the Time of Day

When reviewing your trades, and before entering a trade, consider the time of day. Most day traders thrive in the opening hour of the market.

This is where a lot of action is and where big moves happen.

Some traders, however, don’t trade at all in the first minutes of the market. This is because they view it as too wild or unpredictable.

Trading close to the end of the day may be risky as the trade may not have the proper time to play out before the closing bell. Not everything is going to be the same every day.

It is good to take note of the similarities and just to be aware of the risks certain times of the day can bring.

14. Duration of Trade

One of the main reasons people love day trading is because of the ability to get in and out fast with profit.

The longer you are in a trade, the longer you are at risk. This especially true if you don’t have set stops.

You want to try and avoid babysitting a trade.

This is when you watch a trade way too long, or stay in a losing trade and let it consume your trading day.

15. Monitor Trading Volume

trading volume

Volume is the amount that a stock is being traded in a certain period.

Volume is the force behind the price movement that traders are looking for.

Checking relative volume can help you know what the normal volume of a stock is.

Relative volume is comparing the average volume for a certain time of day in the past with the current time.

Paying attention to the volume of a stock is not only critical before entering, but also throughout the trade.

Monitoring the volume constantly will be invaluable to your risk management.

It can help signal if you're in the right place and when to watch closely.

16. Scaling In and Out of Trades

Scaling into a trade is starting with part of your intended position, and then waiting for more confirmation before adding the rest.

Traders then add more when a target is hit, and the trade still looks to be going in your favor.

Scaling out of a trade is selling part of your position as you hit a target, but leaving some in, if the trade still looks good.

You are locking in profit and still have the ability to make more.

Learning to scale in and out of trades can reduce risk and help maximize profits. You just have to stick to your position size rules, or the one-percent rule to avoid adding too much to your positions.

17. Be Aware of Earning Calls and Other News

Trading a stock near an earnings call can have added risks.

An earnings call is a public conference where a company reports the financial results of a certain period.

Sometimes a stock can be a little more unpredictable in the days before an earnings call. This happens as traders react to news or what they might be the result of the call.

Sometimes the reactions to earnings calls make no sense at all.

For example, there are companies that report good earnings with no issues, and the stock will still plummet the next day.

It is a good idea to check the news and alerts provide for a stock, as news can have the same effect as earnings call.

18. Testing Day Trading Strategies

Finding and testing the best day trading strategies can help you manage your risk.

As you test strategies, you get more comfortable with them and learn why they work.

Having a strategy helps with trade planning and can help you feel more comfortable with a trade.

If you test a strategy enough you can develop an edge as you learn how it works.

A good strategy is a good plan, and a good plan helps manage risk.

19. Broker Risks

Order execution is how fast or well a broker can complete your trade after you click buy or sell. While order execution is something to consider, but there may not be much you can do about it.

There is no real way to compare the execution of one broker to another directly. You also have to consider the quality of the platform and tools they offer.

Some traders don’t think much about how much difference a broker can make in a traders’ experience.

“What you get is what you pay for,” is a saying that definitely used to apply to stockbrokers. Most brokers are now commission-free for most of the stuff that normal day traders do.

Commission-free trading is a great place to start for most. Some brokers have a seemingly better execution reputation and still charge commissions.

20. Mobile Day Trading

mobile trading

It always brings tears to the eye when you see someone trying to day trade on the phone.

Swing trading or entering a position for a long term investment may be no problem on the phone. Yes, people can and do make money day trading on the phone. It is just going to be slower, no matter what.

We are talking about risk management, and you want to reduce risk wherever you can.

You don’t have to have a four monitor setup with your computer, but you need more space than a phone can offer. You also face the risks of getting notifications, texts, or a phone call while trying to make a trade.

A real computer can usually offer a better internet connection, more space, and better trading platforms.

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