A trader needs to admit that he cannot control his losses if he doesn't follow proper risk management.
A Trader needs to draw a line between a businessman’s risk and a loss. As businessmen always take predetermined risks, traders should also develop a proper risk management system and decide their risk in the first place and should not take a loss greater than this predetermined risk.
A storekeeper takes a risk every time he stocks new merchandise. If it doesn’t sell, he’ll lose money. An intelligent businessman takes only risks that
will not put him out of business, even if he makes several mistakes in a row. Stocking two crates of merchandise may be a sensible business risk, but stocking a full trailer is probably a gamble.
As a trader, you are in the business of trading. You need to define your businessman’s risk—the maximum amount of money you’ll risk on any single trade. There is no standard amount, just as there is no standard business. An acceptable businessman’s risk depends, first of all, on the size of your trading account. It also depends on your trading method and pain tolerance.
The concept of a businessman’s risk will change the way you manage your money
The absolute maximum a trader may risk on any trade is two percent of his account equity.
For example, if you have Rs. 30,000 in your account, you may not risk more than Rs. 600 per trade, and if you have Rs. 10,000, you
may not risk more than Rs. 200. If your account is small, limit yourself to trading fewer shares.
If you see an attractive trade, but a logical stop would have to be placed where more than 2 percent of equity would be at risk—pass on that trade. You may risk less, but you may never risk more. You must avoid risking more than 2 percent on a trade.
Do you keep good trading records? Poor record-keeping is a sure sign of a gambler.
Good businessmen keep good records. You can visit Good Record Keeping for more details.
If you bail out of a trade within your businessman’s risk, it is normal business. There is no bargaining, no waiting for another tick, no hoping for a change. Losing a rupee more than your established businessman’s risk is like gambling. You would never want that to happen.