MANAGE YOUR RISK

                             The only factor a trader has under her control when a trade is opened is
risk. Managing the amount of money you lose when a trade goes bad is
critical to your longevity as a trader. The reality is that there is no safe

way to trade, and losses are a part of trading. If you do not learn to manage
your losses, you will either blow your account out on one spectacularly bad
trade or grind it down to nothing over time. Bargain hunting by definition is
about managing risk. Seeking out the best entry price for a trade may lower
the risk necessary to take it, but you still must manage risk appropriately
when things go bad. This is why managing risk through stop orders is the
fourth principle of a bargain hunter. The tactics used by a bargain hunter
to manage risk are discussed in Chapter 4.
                                            If you do not manage risk appropriately, your losses will add up
quickly. Unfortunately, losses are not on an equal playing field with gains.
With each loss your account suffers, it requires a larger return to recoup
the loss and return your account to breakeven. Table 2.1 clearly illustrates
how losing just 25 percent of your account will require a significant effort
to return your capital to breakeven. Considering that the best money managers
on Wall Street would be thrilled to post a 33 percent return annually,the average retail trader would be hard-pressed to post a 100 percent gain
after suffering a 50 percent loss. You must manage your risk and avoid a
draw down so significant that you are unlikely to recover through trading
profits alone. Whether you risk 2 percent or 5 percent per trade, always
know what that limit is and aggressively cut off bad trades early, before
they wreak havoc on your trading capital