Risk Management Techniques for the Everyday Trader

by Lance Ippolito | Oct 24, 2020

Editor’s note: With Lance on vacation this week, we’ll revisit some of his timeless investing tips, and throw in some interesting scanner orders at the end!

Knowing the right risk management techniques is one of the easiest ways to ensure that a trader has a successful future in profitable trading.

Risk management is the process of identifying, analyzing and accepting (or then trying to reduce) the amount of risk a trade or investment will have.

This also ranks pretty low as a priority to most traders. But effective risk management is important if a trader wants to keep their gains over the long term. Keeping your losses to a minimum means losing less money in the end — and that’s good for your portfolio!

Is the 1% Rule a Good Risk Management Technique?

Typically, you’ll see day traders follow the 1% rule as a risk management technique. This rule means that the most amount of risk a trader is allowed to take for every trade is 1%.

Traders do this by choosing the size of their position so that their total amount of losses is only 1% by the time their stop-loss is triggered.

But let’s be real, some trades are going to require more risk than just 1%. This is the investment world — some risk is necessary for incredible gains. In order for everyday traders to get those desirable profits, they’ll need to know more than just one technique for managing risk.

Risk Management Techniques for the Everyday Trader

I know everyone loves talking about how much money they’re making with all their massive gains in the stock market

But no one ever wants to talk about risk management — the key to successful trading and investing.

Having inadequate risk management techniques (or none at all) has already proven disastrous for the economy: The 2007 mortgage meltdown that led into the Great Recession resulted from extremely poor decisions about risk.

Knowing the amount of risk you’re taking on in a trade is, without a doubt, the difference between winning and losing.

Now, I like to trade a lot. I actively trade every day and I love to hold a boatload of positions at once.

However I only have two eyes, so I need to have proper risk management if I want to be able to keep feeding my cats.

Check out the video up top for the No. 1 thing I do when it comes to managing my risk. I also want to hear your thoughts on proper risk management. Let me know in the comment section below what you do to manage your risk on trades.

Top Order Flow

These are the earnings plays we’ve seen the past few days for this week. Crowdstrike (CRWD) reports after the close Tuesday and market makers expect a move of $32.22 higher or lower with shares trading around $306.60 Monday afternoon. Keep in mind that puts are often hedges against long stock positions should it tank on earnings.

As always, respect that risk!

CRWD Jun24 14th Strike: 310 Puts premium: $445,905 ABOVE ASK BEARISH
Trade Date: June 3, 2024 Trade Time: 12:09 pm
CRWD Aug24 Strike: 280 Puts premium: $990,760 ASK BEARISH
Trade Date: June 3, 2024 Trade Time: 9:35 am
CRWD Jun24 7th Strike: 295 Puts premium: $123,300 ASK BEARISH
Trade Date: May 30, 2024 Trade Time: 3:22 pm
HPE Nov24 Strike: 25 Calls premium: $195,480 ASK BULLISH
Trade Date: May 28, 2024 Trade Time: 3:02 pm
DLTR Dec24 Strike: 130 Calls premium: $154,165 ABOVE ASK BULLISH
Trade Date: May 30, 2024 Trade Time: 9:44 am
LULU Jun24 7th Strike: 345 Calls premium: $184,630 ASK BULLISH
Trade Date: May 30, 2024 Trade Time: 2:24 pm