Many day traders fail for one reason, and one reason only, their trade management is not properly planned out to ensure them any long term success. Trade management is how a trader determines precisely how much trading capital he/she is going to risk on a single trade. Trade management to many, is considered more important than the profits they make, because strict risk management can be the determining factor between becoming a successful trader or not.  Having the correct trade management is essential to all traders because it provides traders with:

  • Long term profits (cut losses, maximize profits)
  • Protection of capital
  • Preservation of trading confidence
  • Removing of emotions

Risk management can very well be different for every trader, because each trader has their own level of risk they wish to accept on each and every trade they place. How a trade is managed also depends on how many contracts a trader is trading with, for example, a one contract trader should look to take profit at just one target, where as a person trading two or three contracts can afford to scale out of their trade by having multiple profit targets. The style of trading is also crucial to determining how much of a stop to use on each trade, for example, at the School Of Trade, for our scalp trading, our stop is four ticks, for intra-day trading we use a six tick stop, for position trades we recommend twelve tick stops and for swing trades we recommend a twenty-four tick stop.  Also, remember when determining your stop levels, it is a good rule to make sure your stops do not exceed between 1-5% of your account on each trade. At the school of trade we prefer 1-2%, and will hardly ever use a 5% stop. An example of this would be to assume you have an account balance of $10,000; the conservative risk management for this account would be to risk only $100-250 on any given trade, thus only risking 1-2.5% of your account on a single trade.

 At the School of Trade, we recommend having a 1:1 (risk 10 ticks to make 10 ticks) or 2:1 (risk 20 ticks to make 10 ticks) risk/reward ratio. When trying to determine which risk/reward ratio to use, it is best to ask yourself how much capital you have to trade, and what you plan on trading. For example, let's say you use the following trading structure when trading the Crude Oil futures:

  • Account Size: $10,000
  • 1:1 risk reward ratio ($10/tick)
  • Risk on each trade $100-250

With these parameters, your maximum stop allowed on a single trade would be between 10-25 ticks, with a take profit at 10-25 ticks; assuming your trading with 1 contract you would be looking at a total risk of $100-250 and a profit of $100-250. If you traded 2 contracts, you should have between a 5-10 tick stop (2 contracts X 5 Ticks = 10 Ticks Total)

Now, with a 2:1 risk/reward ratio, you will be obviously risking more on any given trade, but you would also be using multiple contracts to increase your profits. Let's use the same example as above, trading the Crude Oil futures with a $10,000 account; using a 2:1 risk/reward ratio, and still risking 1-2.5% on each trade. When using a 2:1 ratio, you will want to be trading multiple contracts, meaning with a $10,000 account, you could trade 4 contracts per trade.  When trading 4 contracts on the crude oil, the max stop you will want to use on any given trade would be 6 ticks, (6 Ticks X 4 Contracts = 24 Ticks ($240)). In regards to your take profit levels, you would scale out in the following order, +3 Ticks (2 Contracts) +6 Ticks (1 Contract) and the final contract you would let run for continued profits. With this trade structure, to ensure locking in profits at +3 Ticks, the School of Trade utilizes an automatic trade management plan like the one offered through NinjaTrader. With the ATM strategy set, it automatically move our stop to break-even +1 tick when our first target is reached, protecting us and giving us quick profits. 

Here at the School of Trade, we offer many different strategies to all types of traders, from scalpers to swing traders.  What makes our trade management plan so effective is because we can cater it to any trader, and will work with individuals to get the proper risk management they desire on each trade. It is very important to remember that having a well planned exit strategy to all your trades is more important than even your entry technique, why is this? Well, because having a proper risk management technique, one that allows you to trade aggressively and still protect your trading capital, is a necessity if you strive to become not only a profitable trader, but also consistent in your profits. If your exit strategy is not set-up correctly, then it is almost certain that you trading account will lose money, and you will eventually lose all of your trading capital. Also, with a well thought out risk management strategy, it is by far the easiest way to grow your trading account exponentially.