By Barry Burns

Part of Trend Trading For Dummies Cheat Sheet

All types of trading are risky, including trend trading. No matter what type of trading you do, not employing risk-management techniques in your trading is fiscally irresponsible. Here are few techniques to get you started managing risk:

  • Manage leverage responsibly. Leverage is a two-edged sword. It can help you make money faster, but it can also cause you to lose money faster. Consult with your broker regarding the amount of leverage made available to you to help you decide whether you should use leverage. Be conservative in your decision.

    Don’t risk more money than you can afford to lose without disrupting your overall financial life plan.

  • Practice diversification. Trading various uncorrelated markets concurrently can help dilute the risk of having all your money committed to one financial vehicle.

  • Consider hedging your positions with options and/or futures. These highly leveraged tools can help offset the risk of your primary position with a relatively small amount of money. It’s similar to buying insurance.

  • Utilize effective money-management techniques. Use protective stops to help limit the amount of loss you’ll accept on every trade. Note: You shouldn’t use protective stops only for each trade but also to limit the amount of money you’re willing to lose in a given day, week, month, quarter, and year.