Risk management is essential for longevity in trading from "summary" of Reminiscences of a Stock Operator by Edwin Lefevre
There is a saying that goes something like this: "It is not whether you are right or wrong that is important, but how much money you make when you are right and how much you lose when you are wrong." This is a fundamental truth that all traders need to understand if they wish to have any hope of surviving in the markets over the long term. The fact of the matter is that no one is right all the time when it comes to trading. Even the most experienced and successful traders will experience losses from time to time. What sets these traders apart from the rest, however, is their ability to manage risk effectively. Risk management is not just a good idea or something that you can afford to ignore. It is absolutely essential if you want to have any chance of making it as a trader in the long run. Without proper risk management, you are essentially just gambling with your money, and the odds are heavily stacked against you. One of the key principles of risk management is to never risk more than you can afford to lose on any single trade. This means setting strict limits on the amount of capital you are willing to put at risk on any given trade and sticking to those limits no matter what. This may mean passing up on some potentially lucrative opportunities, but it is a small price to pay for the security of knowing that you will not blow up your trading account in one fell swoop. Another important aspect of risk management is to always have a plan in place for how you will handle losses when they inevitably occur. This may involve setting stop-loss orders at predetermined levels or simply having the discipline to cut your losses and move on when a trade is not going your way. The key is to have a clear and consistent approach to managing risk that you can rely on in all market conditions. In the end, the most successful traders are not necessarily the ones who are the most skilled or the most lucky. They are the ones who have mastered the art of risk management and who have the discipline to stick to their plan no matter what. If you want to have any hope of surviving in the cutthroat world of trading, you must make risk management your top priority.
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