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Focus on Risk as well as Profits

Updated: Dec 25, 2022

Monitoring open risk is critical to successful and profitable trading. It's common for traders to put all their focus on finding trade setups, setting up every trade they find, and closely tracking the Profit Loss Statement (P&L) without considering how many trades they have open, and what happens if the market has a sudden move in one direction. Good Kids Trading (GKT) understands the importance of monitoring open risk, managing a positions risk, and trading small! Too much risk open, not managing your losses, and taking large risks can quickly erase profits.

Earlier in my trading career I would risk 1% of my account on each trade I took. There would times where I would have 6- 8 trades (maybe more) open at once. In a trending market there were no issues. I was making money quickly and the communities I traded in never really discussed monitoring open risk, there was some discussion of moving stops and risk to reward, but the focus was more about reward and less about risk.

I remember the first time the market had a sudden move and I was stopped out of all my bullish trades on a large drop down (a falling tide sinks all ships). Then a day or two later the market went the opposite direction, because of course the drop was an over-reaction, so then I was stopped out of bearish trades (I did move my stops so it wasn't a full loss on all trades). However, in one single week I erased a month of profits because I wasn't tracking open risk. It was a hard lesson, and I would like to say that one week caused me to re-evaluate monitoring my open risk, but it didn't. I wrote that event off as an anomaly, a one off that probably wouldn't happen again. I continued setting up almost every great trade I saw and had a similar experience where a quick move in the market took a chunk out of any progress I'd made. Sharing my experience with you, so you don't have to learn through pain. You do not want to work hard for a month to see your progress erased in a day!

Every trading plan, every strategy you choose for your account should have a plan of managing your open risk. You need to have a set target for how much buying power you use. Know what conditions or market levels would cause you to ramp up or down your buying power. Understand how buying power changes as the underlying for your options positions moves. Remember to keep up with how many trades you have open at all times, track your positions delta, (are all your trades bullish or bearish?), have a plan for reducing position size, and for exiting positions to reduce your risk. Don't forget cash is also a position. In 2022 it's been more obvious than ever, cash is a position as the headlines say: "inflation is at 6% any cash you have is losing value"; if you had money in the market in 2022 (bonds and stocks) or in crypto you are well aware losing 2-6% on your cash might have been the best alternative.

This discussion has been high level to remind you how open risk and managing risk is very important to your success as a profitable trader. If you'd like to get more in depth, if you would like to continue this discussion join our discord! Trading in a community of likeminded people is far more fun, educational, and profitable! Join our discord today:

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