Good morning, traders…
I used to think being right was the most important part of trading.
I obsessed over entry points, chart patterns, and technical indicators. I’d spend hours analyzing setups, convinced that if I could just predict direction correctly, profits would follow.
Then I had a brutal month where I was right 8 out of 11 times — and still lost 15% of my account.
The winning trades were small positions that gained 2% to 5% each … while the losing trades were oversized bets that wiped out weeks of careful gains in hours.
That’s when it hit me: being right doesn’t matter if you’re not managing your risk.
I could nail every chart pattern, predict every breakout, and time every entry perfectly — but if I made $500 on my many winners and lost $5,000 on my few losers, I’d go broke being right.
This revelation changed everything about how I approach not the analysis, not the strategy … but the math behind every single position.
Most traders focus 90% of their energy on being right and 10% on managing risk.
The best traders do the opposite.
Let Me Show You The Simple Risk Management Framework That Transformed My Trading Forever…
The Secrets to Proper Risk Management
Risk management comes down to two factors above all:
- Define your risk.
- Plan your trade (and trade your plan).
Before buying call options for $1.00, decide where you’ll sell on the downside (say, $0.98). That means you’re only risking $0.02, which shouldn’t blow anyone’s account up.
Then, you need to determine:
- How much money you could lose in a worst-case scenario…
- How much money you expect to make in a best-case scenario…
- Where to set your stop loss (risk level)…
- Your expected price target (for the underlying stock and the contracts)…
When you buy options, time decay works against you constantly.
If the stock trades sideways, your contracts will tank.
Make sure every trade has enough meat on the bone:
At minimum, a 2-to-1 reward-to-risk ratio. Ideally 3-to-1 (you have the potential to make $2 to $3 for every $1 you risk.)
Watch contract prices throughout the day, noting their high and low points.
This gives you an accurate gauge of the option premium range.
That way, you don’t guess what a decent fill looks like — you’ll know you’re buying near the low of the day.
How you exit trades matters even more than how you enter them. Exits make (or break) the bank.
Always have a price target where you plan to exit. I like targets for both the share price and the options premium.
If you’re worried about timing, don’t hesitate to set a limit sell order. You can do this as soon as you enter the trade. This order guarantees your contracts sell when you hit your price target.
On the flip side, set trailing stop losses near your risk level. This ensures your contracts sell automatically before losing more than you can handle.
The Biggest Risk-Management Mistake You Can Make
The costliest mistake when it comes to risk tolerance is risking more than you can lose. You can’t oversize your positions.
You have to strike a delicate balance between risk and reward.
Some traders love big risks, others prefer a more conservative approach.
But if you cross your boundaries and break your rules, it can ruin you.
This is why I advocate for hitting singles, especially when you’re starting out.
String together small wins. Build your confidence while fine-tuning your trading strategy.
The best part: By sizing small, you’ll never lose more than you can handle.
How Emotions Affect Risk Management
While all the technical considerations I outlined will help…
At the end of the day, risk management is a personal journey. It’s about your emotions.
I can’t tell you how much money you’re comfortable losing or how much you should strive to make.
These answers come down to personal money management, your personality, your account size, and more…
A middle-aged parent will often (and should) have lower risk tolerance than a 25-year-old Reddit trader.
That said, there are three unshakeable risk management rules everyone should follow:
- Never risk more than you’re willing to lose.
- Focus on setups with a 1:3 risk-to-reward ratio.
- Always determine your risk before entering a position.
Happy trading,
Ben Sturgill
P.S. Blackrock’s $2.4 trillion money manager says “This is the most bullish investing environment EVER”…
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*Past performance does not indicate future results
