Novice day traders have little idea how to manage their trading risk, even as a concept. The typical pattern is that they put on a trade based upon some fairly poorly defined criteria, and when the market eventually moves against them, they are clueless as to when to get out of the position. Instead, they will typically let the trade worsen until it is eventually too painful to retain.

The experienced trader, however, places risk management at the heart of the entire trading plan from the very beginning. If you realize that in this profession, the goal is not just to make money, but also to make sure that you do not lose the money you've got, then you have made great progress%u2026 before you have even placed your next trade!

Put more graphically, if you were to lose, for example, half of your trading capital, the the consequence is that you have a huge uphill task ahead. You will actually have to achieve a fully 100% return, just to break even, i.e. to get back to your starting capital! Worse still, you must do even better than a 100% return to actually go into profit. If you realize that extremely few of the best hedge fund managers make 100% return on capital in a year (never mind all the other more mediocre players out there), you will realize what an truly monumental task this really is.

Yet, ask a few beginner traders and you will find that it is actually very easy to lose half your trading capital quite rapidly. You do this just by placing too large a trading position in the first place; namely betting on ill-defined trading opportunities where your chances of winning are low, and then staying in the position for far too long when it is clear that it has already gone against you and is not coming back anytime soon.

You can read the full online trading article about economists and listen to the trading mp3 podcast there too.