For anyone watching the Super Bowl Sunday we got to see a #1 ranked defense completely shut down a #1 ranked offense. In Super Bowl history 5 times a defense ranked #1 in the regular season has faced a team ranked as the #1 offense in the regular season. In those five meetings only once did the #1 offense win the big game. There is a saying in sports that “Great offense wins games but great defense wins championships” but why is this so? If your defense can shut down an offense then your team only has to score a few points to win the game it lets the offense stick to its game plan and not have to play catch up. If a team doesn’t have a great defense and gives up too many points it puts their own offense at a disadvantage playing catch up as they get behind in the game. It seems to be easier to be a master of not being scored on in the first place than to have the pressure of having to score.
So here is why great defense through risk management makes it so much easier to be a trader:
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It makes trading much easier when you do not have big draw downs in account equity to have to come back from.
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When you only risk losing 1% of your trading capital on any one trade it makes it much easier to manage emotions.
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Not having huge position sizes to watch brings down stress levels a great deal and enables the trader to think clearly.
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Having multiple non-correlated positions smooths the equity curve so you are not losing in all your positions at once.
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If your total risk exposure is only 4% of your total trading capital it makes worse case scenarios not ruinous for you.
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A pure trader can be very careful and take it a trade at a time and not be exposed to multiple correlated risks by holding a full portfolio of investments.
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Focusing like a laser on a method, system, or specific trading vehicles allows a trader to know exactly the historical price action risk of what they are doing.
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Getting on the bear team in down trends and the bull team on up trends is playing good defense against getting scored on by the winning trading team that has the ball.
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Only take plays when the odds are clearly in your favor to avoid being scored on.
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If your #1 focus is to not let other traders take your money it makes it much easier to make profits.
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Being long option contracts to express your trades can give you a limited downside to loss and unlimited upside on potential gains.
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When entering a trade focus on the worst case scenario happening and how much money you could lose not the delusion of a sure thing and easy money.