How To Manage Trading Risk Like a Boss

Dear TradeZella,

Can we talk about risk management for a second?

YES! One of our favorite topics. 😍

We, as traders, hear these two words almost every day in our world.

Sure, "risk management" is... well... managing risk. 😅

However, many of us stop there and fail to give the practice of risk management further thought.

In this discussion, we're going to...

• dive into the true meaning of risk management
• explain what's in it for you as a trader
• leave you with actionable techniques for implementation

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3, 2, 1. Go.

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What does "risk management" truly mean?

Risk management is how you plan to govern over the amount you stand to lose. This can refer to an individual trade, a series of trades, or your trading account as a whole.

You may have heard of...

• Cutting your losses
• Determining a stop loss amount
• R-Multiple (see below)
• Minimizing your downside
• Preventing losses from getting out of hand
• Scaling in and out of trades
• Hedging

Risk management involves strategic planning (and maybe a bit of math). 📝

It involves mentally accepting the risk amount. 🧠

It has to be the top priority for traders before anything else. 📈

Why?

As Sun Tzu, Chinese military general, once said...

"Every battle is won before it is fought."

If you're going to engage in battle (putting on a trade), you must beforehand consider how you will manage your risk.

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Ok, that's great but...what's in it for me?

Think of trading like a sport. There are times when you must seize opportunities and times when you must safeguard against pushback or difficulty. Without both, you're not going to last.

Ever hear the expression...

"Offense wins games. Defense wins championships."

Offense with regards to trading refers to your:

• setups
• statistical edge
• unique playbook
• plan of how to COLLECT money from the markets

Defense in your trading? That refers to (you guessed it) risk management.

• stop loss
• risk amount
• position size
• R-Multiple
• plan of how to NOT LOSE too much in the markets

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In order to win at this in the long run, you need both.

How will you plan to be successful if you don't minimize your downside losses?

(Hint: the answer is, you can't)

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Actionable Techniques

Alright now, what can you do?

The first thing right off the bat is to:

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1) Define your risk amount.

How much are you okay with losing on this trade, on this day, on this account?

This is a conversation you need to have with yourself. Write down these amounts.

Examples:

"I'm planning to lose at most $50 on this trade, so I won't place my stop loss further than X."

"I am setting my max daily loss amount to $120. If I'm at or near that amount, I will stop trading for the day."

"I won't be risking more than 2% of my account on this trade."

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2) Configure appropriate position size

This is based off of what you wrote down for #1.

Let's say you're looking to go long on a stock valued at $100. You're setting your stop loss at $98 (a risk of $2 per share traded).

If you set your risk amount at $50 (defined in #1), you cannot trade more than 25 shares on this position.

This classifies as having proper risk management.

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3) Follow your stop loss.

If you're seeing that you're letting price get away from what you initially intended, where does it stop?

Ways to hold yourself accountable:

• Shift your trading mindset from "Ugh, I got stopped out and should've held" to "It's good that I exited at my stop loss because it's all part of my long-term plan."
• Peep your stats on TradeZella. If you're seeing an R-multiple beyond -1R, you're not following your stop loss.

There's more to it than this, like having a good R-Multiple and scaling, but try those three steps out for now. We're almost sure #3 could use improvement.

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What's new?

TradeZella's big changes

February marked a big month for new additions to TradeZella.

Here's what went down...

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Twitter Spaces

If you're not on Twitter, you might not know that we've hosted a few great audio discussions via Twitter Spaces.

We plan to hold these a couple times per month on Wednesday afternoons after market close. You'll see us tweeting about it.

Here's one you can listen to later.

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New Dashboard

You'll be able to get a better picture of your P/L, trade expectancy, profit factor, Zella Score and more.

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Your favorite: Playbook

Create your rules. Establish your criteria. Share with your friends.

More on how to utilize Playbook in Zella University.

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User Highlight

"Real growth happens outside of your comfort zone."

Full-time trader alert! 🚨

For this issue, we spoke with Ron Ortega, an options trader and active TradeZella user who followed his dreams to pursue trading full-time...and hasn't looked back. 😎

If there's anything we've learned about Ron, it's that he likes Old Fashioned's, a well-curated charcuterie board, and a solid green trade.

He's put in the work and dedication to go all the way with trading and we're so excited for him.

To pursue trading full-time is certainly not a job earned overnight, so let's hear how it went down!

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TZ: Hey Ron, stoked to feature you this week! So tell us, how long have you been trading for?

RO: I started trading 5 years ago and now, full-time for 2 years.

TZ: That's quite a while! Many that start don't even make it to 2 years without throwing in the towel. What's unique about your trading journey?

RO: I always had a passion for the markets. But, in 2020 I was laid off just 1 month before Covid lockdowns.

I believe that everything happens for a reason.

I decided to take the leap to trade full-time and pursue my passion.

Real growth happens outside of your comfort zone.

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TZ: What a way to find opportunity in adversity. It sounds like the lay-off was a blessing in disguise. Congrats on the success! You sound like you've got a good thing going, why did you look to use TradeZella to journal?

RO: I chose TradeZella as my journaling platform because it has everything I need in one place along with many analytical visuals.

I love being able to create my trade plans, take intraday notes, log my trades, review the ticker chart and so much more.

"TradeZella is really a tool that can be utilized to maximize profitability, while emphasizing risk."

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TZ: Glad to hear the interface streamlines your process!

RO: I’ve tried many online journal platforms but always felt like something was missing.

When I found TradeZella, I realized how much detail I was missing from my trades.

As an Accounting major, I love numbers and data.

TradeZella gives me insights to my trades from a number perspectives but also various analytics and visuals which help me spot weaknesses in my trading system.

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TZ: The insights really can be a game changer. Getting into the details and finding reasoning behind your data is why we're continuing to build out features that do so. Any goals for the future?

RO: My future goals are to continue refining my trading system to continue achieving consistency in any market.

In addition, I would like to eventually donate my time to low-income schools to teach youth about financial literacy, financial markets, and how to invest properly with a focus on managing risk.

TZ: An amazing idea. The world needs more folks like you, Ron! We're excited to see how this year pans out for you. ❤️

-

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If you're reading this thinking, "Hey, maybe I could benefit from a visual approach and defining the details behind my trading..."

Check out this link to get going. 😎

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