Chapter 5: Capital Preservation

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Always focus first on what you can lose, rather than what you could gain.

Be your own risk manager

Prepare for the worst. First you need to think about what will happen if this becomes a losing trade. review your stop loss and position size, and don´t anticipate potential profits.

Analyze the percentage of trading capital you are risking per trade, and see how many consecutive losing trades you can survive.

Plan, plan and plan.

Under no circumstances should you take impetuous trades based on a hunch or rumors. The only way to control the risk of ruin and enjoy a long and profitable trading career, is to develop a plan and follow it.

Good traders are risk managers, first.

Understand the math.

Once capital is destroyed, it takes a much larger return to get back to even. If you have a $10,000 and lose $1,000, that is a 10% drawdown. However a 10% return on your new trading capital does not get you back to even. That takes you back to $9,900, and now you need an 11,1% return to break even.

Be prepared for a losing streak

If you are in pursuit of high returns, they you can expect drawdowns that are about half your return rate. If you maintain consistent position sizing, you will be safe from the risk of ruin. The question is: "where will your account be with a string of 10 consecutive losses?"

Keys to keeping cool. Cut your losses

Losing trades that are getting worse are a major cause of pressure

Know when to get in and out.

When you enter a trade with no stop loss, you have the potential for an unlimited ruin. Trading with no stop loss is like driving a car with no red lights.

What we learned

risk management is the most important aspect to study as a new trader. Learn to trade for the right reasons and limit drawdowns, and you will avoid ruin and preserve your trading capital

Successful risk management will separate you from your competitors