How to Effectively Manage Trading Risk

Asad Dossani
When I first began trading, I didn't use proper risk management techniques. In fact, I lost my entire first trading account as a result.

I was going to talk to you about how to implement trading strategies today. But I now want to make sure that before I do that, you learn how to manage risk, and avoid the mistake I made.

So today I'm going to focus on how to manage risk, which will lead you to a much better trading performance.

Risk management is a critical element of trading. In fact, without proper risk management, you are almost certain to incur large losses. The purpose of risk management is to prevent losses from spiraling out of control. This means cutting our losing trades short, so that we don't lose too much money.

Stop-Loss

What are the tools we can use to manage our risk? One of the primary tools is a stop-loss. When we enter into a trade, we can set a stop-loss. The stop-loss is price level at which the trade is closed out to prevent further losses. For example, suppose we take a long position in USDINR trading at 60.00. We could put a stop loss at 59.50. This means that if USDINR falls to 59.50, we close out the trade and prevent any further losses.

Over my trading career, I have extensively used stop losses. However, recently I have moved on a to a more advanced risk management tool. As part of the algorithm I have created for Alpha Trader, there are no stop losses used. Instead, when we close out trades is variable and depends on market conditions at the time. The algorithm takes care of the risk management, in the sense that losing trades are automatically closed out at the right time.

For current and future Alpha Trader subscribers, you won't be receiving a stop loss as part of the recommendations. Instead, we will simply close out trades when they go bad, and not fix the level beforehand. This risk management system works extremely well. By the same logic, we won't be setting any explicit profit targets. Instead, the algorithm will close out winning trades once the trade has run its course.

Now some of you may not be comfortable trading without an explicit stop-loss. In that case, you can apply your own stop loss to any recommendations we make. At the end of the day, our recommendations are just opinions, and it is up to you how to implement them. But I do encourage you to give our risk management system a try.

In Person Meet

Last Saturday, I had the chance to meet some of our Alpha Trader subscribers. I'd like to thank all those who attended. In fact, I was really impressed with all the questions that attendees asked and the discussion that took place. The attendees ranged from people with many years of trading experience, to people who were just starting out.

Some of the points we discussed included risk management and stop-losses. We also discussed some of the intuitions behind the algorithm used at Alpha Trader. And lastly, we heard many great stories and market insight from some experienced traders.

It is great to have such a diverse and intelligent group of people part of Alpha Trader. And I look forward to future interactions. Please to write to us with your questions, we are more than happy to answer them.

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8 Responses to "How to Effectively Manage Trading Risk"
komal diyawar
05 Aug, 2014
Thanks Mr Asad, Ur article is very helpful for me.SL is essential.Like 
Hameed
03 Aug, 2014
Dear Asad, Thanks for valuable information. I don't understand how your algorithmic system takes care of stop loss. How in a market crash it works without setting a stop loss. Please make it more clear. You said those who wish to set stop loss can do so. Is the method of calculation of stop loss is same as for the stocks? Thanks....Like 
Subramanian Ram
29 Jul, 2014
Dear Asad, Greetings ! Could you elaborate more on Alpha Trader & the algorithm used. I am trading currencies, precisely USD/INR intraday. Would be obliged if you could help in any way. RamLike 
Amartya
19 Jul, 2014
I don't understand "We also discussed some of the intuitions behind the algorithm used at Alpha Trader.". I was not able to attend the session, could you please elaborate thisLike 
Nagarajan
18 Jul, 2014
What do you mean by have your own SL? Isnt that a lame shifting of responsibility? If you are confident that your system handles risk, what is the harm in making me feel more comfortable by having better updates? Rather than giving after market updates, why cant you do a market hour update? In this way I can exit as and when you send an update. Your current way of sending updates after market might be an issue if there is a gap up/gap down that gives no opportunity to enter or exit trades as the case may be, Like 
Nagarajan
18 Jul, 2014
Good to know that your system handles the risk but what is the point if you ask us to cover a trade after closing hours? We might not even get to do so the next morning. Also why can't you give some bands...NG trade...never opened at the level you mentioned...What are we supposed do ? execute at whatever level? Like (1)
Kulvinder Singh Seehra
16 Jul, 2014
Good. I would like to shed some light on another equally important topic - Money management, which is very important for effective trading. Like 
prasad
15 Jul, 2014
good,u have not set stop losses and your system is taking care of that. however, in practice,when the market is highly volatile with un expected fluctations, u may have to send SMS alerts rather than depending on emails to alert members. Like 
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