“That’s why most people lose money as individual investors or traders because they’re not focusing on losing money. They need to focus on the money that they have at risk and how much capital is at risk in any single investment they have. If everyone spent 90 percent of their time on that, not 90 percent of the time on pie-in-the-sky ideas on how much money they’re going to make. Then they will be incredibly successful investors.” -Paul Tudor Jones
What if a traders step one was not profits but the planned management of losses? What if the key to returns was to limit draw downs not to win all the time? What if the thing that caused new traders to fail was primarily a traders mental ruin and that this was caused primarily by losses? One really big loss or long strings of consecutive losses can quickly cause traders to give up. Also, long winning streaks and big wins can also be erased quickly by big losses that are taken due to position sizes that are too big for a trading account to handle.
If you start with risk management understanding the proper assets under management at risk per trade and the maximum draw down you want to deal with and then work your way backwards to a robust system, that could change everything. This process could make you profitable and allow you to follow a system with less emotional and psychological pain involved. How much percent of capital you are willing to lose when you are wrong and how much risk at one time that you are willing to expose your account to is the first question a trader should ask and then from there you build your trading method accounting for possible draw downs and position sizing. This is a crucial mistake that most new traders make their first plan is profits but they fail to plan for losses, so when the unexpected happens the losses take away their past profits if they are lucky and their whole account if they are unlucky.
“Risk is a no-fooling around game; it does not allow for mistakes. If you do not manage the risk, eventually they will carry you out.” -Larry Hite
“The key to long-term survival and prosperity has a lot to do with the money management techniques incorporated into the technical system.”
Ed Seykota