Ponder the following from Tsatsu Tsikata, chief executive of Ghana National Petroleum Corporation:
Not managing risk is itself a risky option.
Or this from Zachary Snow, Futures Magazine:
If we blow ourselves up, who cares. We have not bet the ranch.
Think about any investment strategy that has rules for when to enter and when to exit. But how much do you trade each time you enter? 100 shares? 1000 shares? 1 contract? 5 contracts? Isn’t that important? It is very important. This is where not managing your risk becomes risky.
So how much do you trade each time? This is where not betting the ranch comes into play. Let’s say you have $10,000. You get your entry signal. Do you bet $200? $2000? $5000? Try betting $2000 each time. However, where do you stand if your first 3 trades are losers? Down 60%? Ouch. Betting $2000 each trade on a $10,000 account is a path to the poor house. What is an average bet size for most great traders? 1-2%.
Risk management (or often called money management) is intertwined into every fiber of all legitimate trend following strategies. No risk management equals no trend following. It’s that important.
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