One of the leading traders on Chicago Mercantile Exchange, because of a single trade lost everything!

For all of his years of experience and money, he had failed to master the most important concept in trading: Risk Management!

Each trader seems to have his own unique way of identifying market opportunities. One buys a stock in the hopes of never having to sell it, while another might hold a position in the market for a day or even just a few hours. Yet both individuals might be immensely successful in the markets. How can that be?

It's because every trader who has been consistently successful in the markets has mastered the concepts of risk management.

Warren Buffet's two rules of investing are:

1. Never lose money and

2. Never forget rule number 1!

Paul Tudor Jones says that he is always thinking about losing money as opposed to making money. He does not focus on making money; he is focusing on protecting what he has!

Jim Rogers, who for years was a partner with legendary hedge fund investor George Soros, said "My basic advice is don't lose money!"

Bernard Baruch, the renowned investor from the first half of the 20th century advised "Learn how to take losses quickly and cleanly."

Yet, when most people start trading, the only thing they think about is the profit objective. Countless hours are spent on discovering how to buy and sell the market with unwavering accuracy. Once they buy a market, the amateur trader only thinks about how high is the market going to go. Little effort is put into considering how low the market could go, and where they should get out in order to control their losses.

These thoughts, which are so distant from the minds of most traders, are what separate the winners from the losers.

Risk management is the practice of determining what percentage of your account to risk for each and every trade in order to maximize the expected profit potential of your trading strategy.

Once this amount is determined, this percentage must be translated into an absolute value and stop loss orders must be placed once a trade is entered in order to control potential losses at this value.

There is no guarantee that such efforts will control your losses, since the market can gap in price beyond your stop loss order, resulting in losses greater than planned.

About the Author
Copyright © 2005 Ioannis - Evangelos (Akis) C. Haramis
haramis@greekshares.com
http://www.greekshares.com
Ioannis - Evangelos (Akis) C. Haramis was born in Athens, Greece in 1951. He studied in Greece, in USA and in Belgium and has been active in the stock markets since 1972. Since 2002 he is New Business Development Managing Director at an Investment Bank and the editor of http://www.greekshares.com