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Risk Management Plan For Day Trading: Bad Habits of Day Traders

In this post I want to talk about one of the most important concepts for day traders and that is risk management day trading. 

Traders face various types of risks, including market volatility, liquidity constraints, counterparty default, and operational failures. These risks can lead to significant financial losses if not managed effectively. So, implementing robust risk management practices is very crucial for all traders.

Risk management is one of the fundamental principles of day trading that all traders must understand and implement in order to have long term sustainability in trading and eventually becoming a profitable trader.

Traders Need a Roadmap to Manage Risk

Here’s a weird fact about day traders. Almost all day traders need a roadmap, when starting out. This is the path to develop good habits before bad habits which is crucial to setting yourself up to become a profitable trader. 

My theory, since I too fell into this trap, and it took me YEARS to get rid of my bad habits and allow my good habits to become the norm, is impulsiveness, thinking you can beat the market, and lack of education – in my case even though I was studying with an academy I felt I had to start trading live way before I was truly ready and felt confident about it.

Practically all traders will tell you that they hit the markets way before they were ready. Most lost bundles due to lack of education and thinking they can buck the system and then went in one of 2 ways – they got the proper education (whatever it was a school or workshops, etc…).

Or they quit and never returned thinking that it’s too risky and a gamble (driving a car without ever learning how is also risky and gamble, you need to learn what you’re doing first).

risk management in day trading
Traders face various types of risks, including market volatility, liquidity constraints, counterparty default, and operational failures – it’s vital that we manage these risks when we trade.

Since you don’t need to prove your education levels or understanding before entering the markets, all you need is the money, anyone thinks they can do it.

And then they find out what it’s all about.

However, the absolute NUMBER ONE bad habit that you can avoid from the get-go is ignoring risk management.

What is Risk Management in Day Trading?

Risk management is a fundamental concept in trading that involves identifying, assessing, and mitigating potential risks to protect investments and optimize returns. 

So, for traders, risk management includes a range of strategies and techniques designed to minimize losses and preserve capital while pursuing profitable opportunities in financial markets.

And we discuss those risk management strategies that you should be using as a trader. But first let’s discuss why risk management is so important for traders.

Why Is Risk Management so Important in Trading?

The first and most obvious reason why risk management is so important is so that you don’t lose large sums of money or a large percentage of your capital you have set aside for trading.

Risk management strategies help traders preserve their capital by limiting the amount of money at stake in each trade or investment. By controlling risk exposure, traders reduce the impact of potential losses on their overall portfolio.

Effective risk management allows traders to strike a balance between risk and reward. By understanding and managing risks, traders can make informed decisions that align with their risk tolerance and financial objectives, aiming for favorable risk-adjusted returns.

By consistently applying risk management principles you will promote long-term sustainability in trading. And by avoiding excessive risk-taking and adopting prudent risk control measures, traders can withstand market fluctuations and navigate challenging market conditions more effectively.

By consistently applying risk management principles you will promote long-term sustainability in trading.

What Happens When you Ignore Risk Management

Risk management is so important! This is something that all pro traders will tell you, all schools and experts do too. However, most traders (me included) don’t believe it’s true. Until you lose too much, all because you couldn’t handle the fact that the trade simply didn’t work out and you ignored proper management of risk in trading. 

So instead of getting out and moving on to another good trade (because there is always another good trade coming), you move your risk management. Or remove it completely, praying, hoping it will go back in your direction.

Praying and hoping in day trading is where you know you are in a seriously bad trade. Unprepared and screwed. A baseball player never enters the stadium wishing and praying and hoping they will win. They know exactly what to do, if they mess up, they move on quickly to do better moves. Because it’s not about crying over the bad, but immediately going forward to a better position.

The same with day traders.

RISK MANAGEMENT is the ABSOLUTE MOST IMPORTANT element of trading. If you don’t follow a sound risk management plan you will surely lose not only the money but emotional capital too.

Often the best approach to risk management and trading overall is to simplify your day trading strategies and risk management plan. And by removing complexity you can develop a consistent approach to your trading that you can implement for the long-term. This is the best way to develop into a successful and profitable trader over time.


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So let’s look at some of the specific risk management strategies available to us as day traders.

Risk Management Day Trading Strategies

i) Diversification

Diversification involves spreading investments across different assets or asset classes to reduce overall risk exposure. By not putting “all eggs in one basket,” traders can minimize the impact of adverse price movements in any single asset on their entire portfolio. 

ii) Stop-loss Orders

A stop-loss is an absolutely crucial part of risk management day trading. You should be using one every time you trade.

Stop-loss orders allow traders to set predetermined exit points for their positions. These orders automatically trigger a sell (or buy) order when the asset’s price reaches a specified level, limiting potential losses. 

So with a stop-loss you minimize risk by defining your maximum acceptable loss per trade and protecting against significant downside moves.

iii) Position Sizing

Another very crucial aspect of risk management day trading is position sizing. This involves determining the appropriate size of each position based on your risk tolerance, account size, and the overall portfolio’s risk profile. 

You should be carefully sizing positions relative to your account size and setting position-specific risk limits for example only risking 1% of your total trading account each time you trade.This way you avoid overexposure in any single trade.

iv) Risk-Reward Ratio

The risk-reward ratio is a fundamental concept in risk management that involves evaluating potential returns against the associated risks before entering a trade. 

When you trade you must assess the ratio of potential profit to potential loss for each trade, aiming for a favorable risk-reward profile. 

By seeking trades with a positive risk-reward ratio (where potential rewards outweigh potential risks), you can improve overall trading performance over time.

Take a look at part 2: Profit Management.

Day Trading for Beginners

If you want to learn more about my journey you can read it here. Or you can watch on my YouTube channel.

You want to learn day trading for beginners – Sign up for the FREE Mini Course.

So if you have any questions you can always ask me at traderchick.com. Or if you want to learn day trading basics – check out MY Courses.

Bad Habits of Day Traders - Risk Management Plan