Risk Management
One of the greatest misconceptions when it comes to investing and trading is that the most important metric of success lies in picking the best trades and investments. If you are trading and investing with longevity in mind, the most crucial skill you have to develop is risk management. Making money is extremely easy in the stock market. All you have to do is dump money in a proven ETF and let it grow over the years. However, most of you are not happy with the average returns that the market yields, and thus prefer to pick and choose your investments and trades instead of letting fund managers do so. Some of you want to rapidly accelerate this process and take up on trading instead, to really help boost up account performance. However, the issue is, most retail traders somehow end up losing most of their money in the stock market. The most interesting thing is that when you look at track record of many retail investors, most of their trades perform well sometimes. Yet, even when the majority of their trades return profits, the losses they acquire in a handful of trades are enough to erase through all the profitable ones.
Careful observation and studies of why the majority of traders are unable to turn profits has led to some incredible insights. The most impressive fact is that over 98% of all traders lose their money in the markets. That is an absolute jaw dropping fact. 98% of people that try to day trade are unable to beat the market and end up losing money. Another interesting insight about this is that the failure rate of day traders is often attributed to a combination of psychological biases, lack of discipline, and inadequate risk management. Failure to achieve consistent long-term profitability steams from a lack of intelligence or effort — rather, it often arises from behavioral flaws, emotional decision-making, and a lack of structured risk management. Many traders enter the market with unrealistic expectations, treating it more like a casino than a strategic enterprise. They chase momentum, over-leverage positions, and allow fear and greed to dictate their actions. Over time, this leads to inconsistent strategies, mounting losses, and eventual burnout. Skeptics to this fact will try to levy arguments blaming market conditions. Reality is that statistics show that this statistic persists regardless of market conditions. Whether markets are bullish, bearish, or moving sideways, the same pattern holds true: the majority of traders act reactively instead of proactively. They fail to develop a repeatable edge, ignore proper position sizing, and often abandon disciplined strategies the moment discomfort arises.
So the question becomes, how do you defy the odds and become part of the top 2% of traders?
The answer is as simple as it is deceptive. It is paradoxical. The one and only thing you have to do to be part of the top 2% of traders is simply treat this as a business, not a personal hobby. Most traders treat trading like their own little casino, while the rest fail to maintain the same level of serious approach all throughout the process, and all it takes is a major screwup to send them back to square one. Treat this endeavor with the upmost seriousness and you will get serious results.
The Problem
The problem with traders, particularly those in Trade Pass, is that lack both the emotional maturity to have restraint while also lacking the steps to build a strong portfolio. Remember, day trades are only short and quick executions with the intention of generation cash fast. This is a strategy to derive profits faster than average, that’s all. The average SP 500 yearly market gain is 10%. Traders often forget the fact that the best method to growing your portfolio is by investing a significant amount of your trade earnings into long-term holdings. So, how do we achieve longevity and prosperity long term with the trades we take? Adhere to the following steps:
The Steps
Step #1. Manage your risk exposure. Every single time you make a trade, you are risking a certain amount of money. You have to be very conscious of how much money you are trading. If you have a small account, it doesn’t make sense to risk 50% of your entire portfolio in a single trade, would it? It’s better to mitigate the risk as much as possible. The best ideal risk should honestly be under 1%. This is hard to achieve when you have an account under $100,000.00. If this is the case for you, then it’s okay to risk larger amounts while growing it, but make sure the trades are carefully managed at all times and have the highest level of confidence in working out. For an account worth around $10,000.00, I would recommend trading with no more than $1,000.00. Ideally that number would be $500.00, but I understand that if the person is trading options, premiums can be a bit expensive. The strategy for managing risk exposure is to arrive at a comfortable number in which you are okay losing money. That is, if you are risking $1,000.00, and your tolerance for loss is $200.00, then make sure to stick by that. On the other hand, when you do take profitable trades, try to also have them reach that $200.00 mark as well. Try to keep your trades par 1:1, meaning your profits and losses are more or less the same. It’s okay to be more flexible with trades that are performing overwhelmingly great, but definitely be more risk-averse with those that show weakness.
Step #2. Manage your trading psychology. Trading is one of the most paradoxical things you can do, because both failure and success work against you mentally. When you fail at trades consecutively, the feeling of loss and frustration can overwhelm you, and thus cause anxiety. That anxiety manifests itself in various ways, including unwillingness to trade a setup because you are too scared, or unwilling to let a profitable trade continue running out of irrational fear of a reversal. On the other hand, if you are too successful, said success can embolden you into taking unnecessary risks. It can make you overconfident and thus create a vicious cycle of maladaptive behavior. Taking profits can lead you to increase your risk exposure and thus lead you to take a trade that can erase weeks or even months worth of progress.
Step #3. Manage your skills. It takes time to master the markets. Years of experience can mean nothing when you are dealing with a unique market circumstance that has never been experienced before. Think back to 2020 when Covid struck. Markets were in chaos, and the government quickly issued various orders to try to prevent the economy from collapsing as spending shrunk. The Fed began printing money out at higher rates than ever before. As a result, the economy went back up. This was a chaotic and volatile scenario that traders had no experience in. You have to be sharp and read flexible, able to adapt to the most unexpected news and developments. You need to read up and brush up on your trading skills all the time. I recommend traders to read at least 2 books a year on technical analysis. Mastering and being fluent with all the technical setups, all the indicators and how they work will yield significant results.
Step #4. PAYtience. This takes time. This is by far one of the hardest endeavors to take on, because you are betting against firms much larger than you with people with more experience than you and with money in much greater amounts than you could possibly even count. I will tell you the truth right now. You will fail at trading, point blank. When you begin to trade on your own, the chances of you succeeding on your first go are fractionally small. If you don’t have not just the tolerance to fail and learn, but the willing spirit of stubbornness that makes you keep coming back for more, this isn’t for you, and you will be better off just investing long-term, as most people should. However, if you are part of that small percentage of people that years to maximize their performance, understand that the road to success in this field requires dozens of failures until you find consistency. You will fail over and over and over and over and then win. And that win will mean the most to you, after so much sweat and tears were spent. And then you will fail again, and again and again and again, while you struggle to find an answer as to why you no longer can’t do what you did before. And then you find your footing again, and you start winning. The storm is gone and you will stand up high. And then you will fail again, and again, and again, and again and again. This vicious cycle will repeat itself for years. In all my years of trading, I have not met a single person that achieved consistency trading in their first 3 years. I want you to ponder something for a minute. Hedge funds are run by some of the smartest people in the world. They hire quants straight out of Harvard and M.IT. with PhD’s in physics and mathematics. These institutions are comprised of the most academically achieved alumni in the world. The average IQ would be over 120 in my opinion, meaning only the top 10% of the smartest people in the U.S. are employed. And yet, having the smarted people with all the funding needed to run a good operation, over 90% of hedge funds fail to beat market returns in 5 years. What chance can you possibly have?
Opportunity Favors the Bold
The truth is that you can actually beat all the hedge funds and top 2% of traders if you align all your commitment, will and concentration to this endeavor. I have seen traders reliably beat the market consistently, and that’s because they make it their mission to obsess themselves to improve to perfection. They don’t master the markets, nobody can ever do that. Instead, they learn to master themselves. Don’t ask the world to give you the results you want, don’t pray to God for luck or money. Instead, ask yourself to give more. Demand more from yourself and give everything you have to this. For the people in my Trade Pass memberships, pay very close attention to what I am about to say, because this will be what will set you apart from the average. I assume everyone reading desires to be more profitable than ever before. You can do this, and I have given you all the tools needed for you to enact that. Now, I am going to give you the structure you need in order to materialize consistency in the markets.
First and foremost, before you take any trade, whether that be your own or you following one of the signals in Trade Pass, you will make sure to open a position that is well within the parameters of the risk you are willing to expose yourself. For us to do that, let’s quickly set our risk parameter up. If you have an account under $10,000.00, you should be taking trades no larger than $1,000.00, point blank. That is way too much risk to take on with a small account. If your account hovers above $10,000.00, ensure that your trades take no more than 5% of your entire portfolio. As you start making profits, you will NOT increase the size position or risk parameter of your trades. That will stay fixed, because you are most certainly taking on a lot of risk risking such a large percentage of your portfolio for a trade. When you start accumulating profits, you need to be putting that cash into long-term holdings. That will allow you portfolio’s floor to level up. What I mean by that is that the minimum value of your portfolio will always go up because you have assets growing in value over time. Instead of fully depending on your direct action to grow your money, now you have assets that are growing all by themselves with no needed input from you outside of investment-picking. We will retouch this subject a little bit later, because there is so much you can do to also accelerate passive income that could help offset portfolio risk. For now, let’s stick to risk management parameters.
So, again, prioritize risk exposure by ensuring that the amount of money you use to trade remains fixed. As your portfolio grows, the percentage of risk decreases over time. Let me illustrate. Let’s assume you have $10,000 worth of cash and are using $1,000 to trade. Let’s assume you generate $500 in profit in a month. Now your portfolio is worth $10,500. That translates into your portfolio grew 5% in a month, a significant amount. That money is then placed in long-term valuable investments. You continue doing this for the next year. Let’s assume you continued making $500 a month for the next 12 months. You should have around $16,000 at the end, representing a 60% growth(not accounting for portfolio investment gains). What is key here is understanding that your risk exposure went down drastically. Because you remain trading with $1,000, at $16,000 in net value, that no longer represents 10% of your portfolio, it instead represents 6.25%. This is what I call optimizing your risk exposure by taking measures to redistribute profits into great long-term holdings. You remain making that consistent $500 a month, but now have assets also adding to your gains on the side, maybe with some dividends as well coming in as passive income. Remember, this is not a race. Rushing to try to make larger figures will likely lead to heightened levels of risk that will result in catastrophic losses that will move you further away from your goals. Don’t try to optimize rapid growth while taking on larger levels of risk. Keeping things within the parameters by which you decide is safe will be key. Staying laser-focused and centered in the process is what will drive the growth you desire.
Now that you have your risk parameter set, it is time time to learn about keeping profits and losses par. If your average winning trade nets you $200 on a $1,000 position, your average losing trade should not exceed that same amount. Consistently adhering to this principle helps ensure that your losses don’t outweigh your gains even if your win rate isn’t exceptionally high. It creates a mathematical foundation that gives your trading strategy the chance to excel. This way, you know that if you are coming out with losses, the issue isn’t risk management, but rather your entry and exit strategy. You can better zone in on the problems at hand rather than trying to figure out which of all the variables taking place during a trade is moving against you. Many traders fall into the trap of letting losses run in hopes of a rebound while taking quick profits at the first sign of green. This is an issue I persistently see happening. This behavior skews the ratio heavily in the wrong direction. Even a decent win rate can’t compensate if your average loss is larger than your average gain. On the other hand, by keeping losses capped at or below your average win, you give yourself a structured framework that compounds positively. For example, with a 1:1 ratio, a trader who wins 50% of the time is already breaking even—anything above that becomes profit. The key is not only limiting downside but also enforcing consistency in how trades are closed. Whether you use hard stops or discretionary exits, the discipline to keep profits and losses in balance is a cornerstone of lasting success. If you are day trading, make sure to trade the setup and align your trading size in accordance to the level of profit you think you will achieve and the level of risk you are willing to tolerate.
Stop rushing out of great trades. If the trade is going the way you want it, and momentum is there with good direction, simply elect to set up a stop loss order that will ensure a level of profit at whatever amount you designate as the minimum you are willing to take. If the trade continues moving in the direction you want, the order won’t activate and you will maximize your profit. On the other hand, if the trade begins to pullback, your order activates and you still come out profitable, with the amount of profit carefully selected by you and ensured to have been realized. On the opposite side of things, stop trying to rescue bad trades. Sometimes trades don’t work out and you have to let them go. I see many traders trying to average down over and over and over on a trade with hopes that it will bounce back. Doing this is a fast way to ensure you destroy your port and will lead to failure, no questions about it. Again, sometimes trades go against what we would like them to be, and that’s okay. Not every trade will be profitable. Learn to let go and move on to the next. This goes in line with what I said earlier regarding risk exposure. The more you buy to average down, the more you risk losing. It’s also an awful and destructive set of behavior because even if it works out, what you will learn from it is that rescuing the trade works. Maybe next time it works as well, but then the day will come when it doesn’t, and a loss that would have been $200 is now $1,000. Don’t put yourself in this position and learn to let go of the drowners. You can’t save them all.
Investing with a purpose
Now that we touched up on risk management, let’s turn our attention into a topic that perplexes most people. Did you know that even with a small portfolio, (let’s use the same example as before with a hypothetical $10,000) you can be making your general average monthly return via cash distributions? Yeah, many people often forget that long-term investing does not necessarily have to be all focused on growth stocks. Diversifying a portfolio is key for longevity, and I am a fan of having my portfolio distribute large amounts of cash which I use to take on higher levels of risk. For example, say I make $500 a month from my trades, and I receive $50 in cash distributions a month. There are 3 paths I generally choose from. I can reinvest the cash back into the same high-yield cash distributing security, I can reinvest the cash into high-growth securities, or I can elect to use the cash to take a larger trade than normal. If I elect the first option, the next cash distribution will be larger. Reinvesting back into cash-distributing securities is one of the best methods to increase passive income. It allows the portfolio to organically grow. You simply feed it exactly what it puts out and continue doing so. However, sometimes you expect a certain growth company to outperform others and will rather use the cash to buy more shares. And other times, you are simply very confident in a particular trade set up. Now, we know that we don’t want to get out of our risk management parameters, as they are what will keep us consistently growing. We do not alter that at all under any circumstance. Instead, you can simply use the cash to open a larger trade than average, but will update the exit price of a loss to incorporate the change in risk exposure. For example, let’s assume I made $50 from passive income this month, and I see this great opportunity to take a call option on a trade. My exit strategy for a loss is always $200, but now that I have a position totaling $1,050, my maximum tolerance for a loss is either $175 or $225. I can play it more conservative or a little bit more flexible and tolerant. I do not want to lose out on all the $50 I made passively, that would be a bad move by me that affects the growth of my portfolio for silly reasons. Instead, I simply update my exit strategy to incorporate the added risk.
So, how do we grow a portfolio that yields high cash distributions with the gains that we make from trading? Simple: Pay close attention. The first and most vital component in this is to find a security that is reliable, has a proven track record and is expected to continue performing well. I recommend people to grab securities that yield at least 5% cash and that have payouts monthly or weekly. This is because having that cash coming in at high-frequency will allow you to grow it faster due to compounding. Say you are making $50 a month from passive income. You will have made $600 in a year. Say there is another security that pays $300 semi-annually. If you put are reinvesting $50 into the same security back every monthly distribution, your total gain at the end of the year will be higher. Let me illustrate.
Scenario A: Monthly Distribution (Reinvesting $50/month)
Let’s assume:
You earn $50/month
You reinvest it every month into the same security
The security yields 5% annually, paid monthly (≈0.407% per month)
You reinvest each $50 at the same 0.407% return monthly
We’ll use the future value of a growing annuity formula here:
FV=P×r(1+r)n−1
Where:
P=50P = 50P=50 (monthly contribution)
r=0.00407r = 0.00407r=0.00407 (monthly return)
n=12n = 12n=12 (months)
This results in $614.50.
Scenario B: Semi-Annual Distribution (Reinvesting $300 twice)
Now suppose you receive $300 in June and $300 in December. Assume you reinvest immediately at the same 5% annual yield, but compounded semi-annually.
First $300 is reinvested for 6 months at 2.5% (half of annual yield)
Second $300 is reinvested at year-end, no growth yet
FV=P×r(1+r)n−1
This results in $607.50.
With $500, it doesn’t seem like a drastic difference, but with larger amounts of money, it certainly makes a difference in dollar amounts, although the % difference would obviously remain the same. So, let’s assume you invest in an investment that yields at least $50 monthly. Say you deposit all your $250 derived from a profitable month into it. Let us assume you make $250 every month for an entire year. That’s $13,000 annually in gains from trading. If you reinvested all these gains back into the safe 5% yielding security for one year, your new monthly income would be $650 from said security. At this point, with this passive level of income, along with your trades, you will have something that you didn’t before: options. Options to choose from many paths on which to enrich yourself. This is where things actually start taking a turn for the better in your portfolio. You can continue the same path if you feel comfortable, and continue putting every gain from trading into the same security. Keep in mind, at this point after one year, you will be making $650 plus $250, or $900 a month. This is a huge difference from when you started at just $250 a month. Once your general $1,000 exposure goes below 5% on an account worth under $50,000.00, only if I am consistently taking profitable trades would I then consider increasing my trading sizing position. Obviously my percentage would go up, and I wouldn’t let it creep over 7.5%, but that would definitely help accelerate profits even more. With a new updated risk management parameter, you can start allocating gains and cash distributions into high-growth securities or high dividend yielding securities if what you want is larger levels of passive income. Ideally, what you want to have is your monthly passive income be around what you generally risk taking a trade. Things tend to equalize rapidly after that and your levels of risk exposure go down.
This Could be you
I ran a very simple computation that is going to excite you a lot, and hopefully change your approach to trading and investing. I am going to walk you through a scenario to explore the power of compounding and reinvestment. Imagine starting with a brokerage account worth $10,000 and consistently generating $500 in trading profits each month. Rather than letting that cash sit idle, every dollar of those monthly profits is invested into a stock that pays a 5% annual cash distribution yield, with dividends issued monthly. Let’s point out the key basics:
You generate $500 in profit each month, which is fully reinvested back into that same 5% yielding security.
You start out with $10,000 in your account.
You place all gains into a stock investment that yields 5% annually, paid monthly.
The monthly yield is approximately 5%.
All monthly passive income will be reinvested.
If you invested $10,000, by the end of your first year, you will be making
$600/month passive income
Your account value will be worth over $17,000
Total monthly income will be over $1,100 from both trading and passive income.
Get Serious
I want you to do something. I want you to think of where you will be in life a year from now. You can be in the same exact shoes as you are today, and that would be a shame, because that means that for a whole year, you did not develop as a trader. You elected to remain trading impulsively, taking stupid trades in hopes that a gamble would pay off and now find yourself with no improved skillsets, with no improved mental maturity and no improved financial circumstance in your portfolio(excluding all external factors). You have to make a choice now, not tomorrow, not next week, but now, to change course. I have so many members in Trade Pass that play the signals and make money, yet I see no improvement. Gains and success has gotten to their heads and is poisoning their future. They are slowly getting stuck in the hamster wheel, where every profit they generate from our trades is gambled away and lost, with no real progress or consistency. It is time to stop and get serious, to start treating this as a business. I am not saying don’t take risks, but make sure they are mitigate and so minute that they won’t offset your progress. If you have consistent gains coming in, it would be ideal that you are putting that money to work for you. In fact, I advocate and highly encourage you to open a boring brokerage account with another company that you won’t trade in, like Fidelity or Vanguard, and keep a portion, if not all, of your long-term investments there. Every single month, you simple transfer funds into that account and make the purchases there. That would allow you to alleviate yourself from the pressure you get from the dopamine rush that takes place and makes you impulsively take dumb trades. The time to change and grow is now. Make the choice to become the man of tomorrow today and stop wasting your time.