Most new traders take a common path. They start off by following the lead of the person or agency that sent them the glossy brochure on making big money easily and quickly trading Futures. Once they have purchased and followed the plan the best they can, they soon become aware of the realities of trading. Profits are not the only thing that comes quickly to traders. Losses come just as fast, as normally for most traders, more often than profits. And if the trader has managed an even division between profitable trades and losing trades, often the losing trades are much bigger in dollars lost.

Although the purpose of trading is to make a profit overall, it is usually all most traders focus on. With so much energy expended on profits to be had, not enough energy is expended on the aspect of risk control.

Risk Control deserves much more attention than most traders are willing to give it. With Risk Control, the trader would not settle on simply evaluating potential profit, but also potential loss. It is very important that a lot of attention be given Risk Control before any trade is taken. Additionally, initial risk exposure should be logically determined rather than a flip of the coin or some random percentage. There should be some rhyme and reason to why a certain amount is being risked, and how this initial risk is to be setup when the trade is actually placed.

It is common knowledge that if a trader were to cut losses short and let profits run, that one could actually become profitable even if the win percentage of trades is less than 50%, or even 40%. What that means is, if you took 10 trades and only 4 were profitable and 6 were losses, as long as the losses were small and the profits larger than the losses, your trading account would end up net positive.

As stated earlier, too much focus is put on the profiting end of planning a trade and very little if any on properly determining risk exposure. Additionally faulty is to pick a random amount to risk per trade, or to simply risk a certain percentage of your overall account total. Although it is a good idea to never risk more than a certain percent of your overall account on any one trade, it would not be the best way to determine the actual risk dollars on a trade. Just because you CAN risk $1000 on any given trade due to your account size, it would be arbitrary and foolish to do so. Again, a logical and objective view must be taken towards determining the amount of risk dollars when entering the trade.

Initial risk control starts with a method that is logical and sound for determining initial risk exposure. This must be determined BEFORE the trade is taken, not after. It has been determined that once you are in a trade without a risk control plan, one cannot be adequately decided upon at that point and the trade is in danger of excessive losses. The mind tends to jump around as to where a trade should exit once the trade is on, if it starts to move into negative territory. It becomes difficult to decide where to exit if not originally planned and committed to before the trade was taken, and often times what prompts the exit is the agony and pressure created by losses just too strong to bear any longer. Hope, fear, panic are the bedfellows of those who fail to focus on Risk Control BEFORE taking the trade.

Because there are varied ways in which a trader can determine his initial risk and plan the exit in case of loss, we do not have the room here to cover them all. However, a few points may provide some direction or idea for those who have yet to focus on Risk Control.

Ask yourself this question when planning to enter a trade. "Why am I deciding to enter at this particular price?" There must be a reason why you feel entering at a certain price will produce profits if you take the trade. Usually, if the reason for taking the trade is a logical and well planned out one, you will also know at what point this is no longer the case. Is it because of strong resistance or support? If so, then would price moving past that resistance or support value change how you originally viewed this trade? If this be the case, then you have already identified the price area where you should exit the trade, and can then simply determine how much you would be risking from the price of entry to the price where you should exit. If this risk amount is within your acceptable range, is small and manageable, then you can place a stop-loss at that price point at the time your trade is filled for entry. You have planned not only your profit probability when deciding to enter this trade, but you have also determined your risk exposure and then put your Risk Control into affect.

Some use recent support and resistance determined by prior tops and bottoms, some use moving average lines, trend lines, Gann lines, or Fibonacci Retracement/Expansion ratios. If properly applied, they can be very helpful in determining risk exposure and planning Risk Control. The use of crossover indicators often associated with Oscillator type indicators make it difficult to determine initial risk, and unless you can quantify over an extended amount of prior price history that the loss usually does not exceed a certain average amount, it would not be the best Risk Control approach to use in my opinion. Either you are able to determine your initial risk BEFORE you take the trade, or you leave yourself open to accepting whatever loss is thrown at you. Unknown risk exposure cannot be considered true Risk Control.

So keep in mind that, although it is important to isolate only those trading opportunities that have good potential for profit, that even more focus needs to be applied to controlling risk. Learn to focus on Risk Control.

Note: About the Author
Rick J. Ratchford is President of ProfitMax Trading Inc. He is a full-time commodity trader for his own account as well as assisting other traders. He has been a computer programmer for more than 20 years and a trader since 1990.