Risk Control

On of the most important ingredients of successful trading is risk control. It may be more appealing on an emotional basis to focus on the pros of trading, but every trader must keep in mind exactly how much of losses he is willing to incur on each trade before cutting losses and how much he is agreeable to have his account debited before re evaluating and ceasing to trade.

Risk can be effectively controlled in two ways:

1. by exiting losing trades. This should be done much before the losses begin to exceed your prearranged greatest tolerance (or "cutting losses"), and
2. by restraining the "leverage" or position size that is being traded for a given account size

Cutting Losses

In the beginning all that the trader is concerned about is incurring losses in his trade. In such a situation what the trader is do is that he will lose mount, hoping that the market will turn miraculously to his favor and his loss will turn into a gain.

Most of the trading strategies involve the use of a disciplined procedure to cut losses. When the position of a trader is down, there are many emotions that come into play. This makes it difficult to cut losses in the right level. The best thing to do would be for the trader to decide where losses will be cut before the initiation stage of the trade. This will provide the trader with the assurance that he is liable to incur losses in his trade.