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How To Profit From A Most Important Stock Trading Lesson

May 14, 2008
Before you start stock trading, I'd like to share a simple philosophy that can make the difference between trading success and failure. What I'm going to tell you is no gigantic stock trading secret or trading holy Grail. There are already hundreds of such products out there available for sale. Unfortunately, the vast majority of them do not address what I'm about to discuss with you.

Two simple words, "risk control", is one of the main things you should keep in mind when trading stock or trading any other markets. "The trader who controls his risk is the trader who controls his destiny". As simple as this statement sounds is very important and well worth remembering.

Let's discuss risk control for a moment. An important part of risk control is how much you risk on each trade. Let's say a stock trader has $100,000 in his trading account and he buys 1000 shares of XYZ Corp. stock at $100 per share. The stock trader has essentially put all his eggs in one basket.

I can't say one way or the other what will happen to this particular stock trader.The stock may actually go up tenfold and make him a millionaire. On the other hand, there is also the possibility that the stock will go down in price. If the stock happens to go to $0 then the trader will have lost all his money and his chances to participate in any future trading opportunities.

The above example is a display of two simple scenarios. The first scenario is the one that everyone who trade stock hopes for. The second scenario is the one that some traders block out of their minds while secretly keeping their fingers crossed.

The point of all this is that the trader above should have had some type of risk control in place. There are a few basic forms risk control he could have used. The first one we mentioned above was limiting the amount of this total account that he risked per trade. The amount to risk per trade is up to the individual trader and his trading plan. Some typical amounts are between 1% and 10% of account equity, with 10% being on the high side. Even if our hypothetical trader would have risked 10%, and his losses would have been much smaller, $10,000 rather than $100,000.

The other basic type of risk control in stock trading is using a stop loss order. Stop loss orders are designed to close out your trade when the stock price reaches a certain price level. For example, our hypothetical trader might have chosen to set a stop loss at the $90 price level. If the stock goes down and our trader gets stopped out then he has lost $10 per share. This, of course, is much more appealing than losing the full $100 per share.

When you begin stock trading and enter into it with the "home run" mentality. Your initial objective should not be to hit a home run, but to stay in the game. By staying in the game. You give yourself many, many more opportunities to profit in your stock trading.
About the Author
Uncover the most useful Stock Charts info, tricks, and methods at Effective Stock Trading. Get the inside scoop with our no cost stock trading ebook. Grab your copy at http://www.EffectiveStockTrading.com today.
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