The number one most important and most overlooked component to becoming a successful trader or investor is risk management. As a trader or an investor, capital preservation is priority. Regardless if you are an investor looking at the potential move of months or years ahead or a day trader looking to capture the small intra-day swings for quick profits, you must have a complete plan. You must plan how much risk you are willing to take on each trade before entering, know how to use trailing stops properly and know when to take profits. There will also be times when you are in a trade and things are just not going according to plan. And you must get out of that trade and look for another opportunity.

Do you know what your own risk tolerance is psychologically? How much can you afford to lose? Are you risking too much based on your total capital? Are you allowing yourself a chance to trade another day or looking to hit a home run on each trade? You must have a predetermined plan and know your limits based on the amount of capital you plan to invest or trade with.

Once you enter a trade, if the market moves against you by the predetermined risk amount you planned, get out! Take the loss. Accept that when investing and trading you will have losses. Losing is expected and part of the business of investing and trading. Think of losses as part of the expenses of running a business. Every business has expenses. The key is to manage the loss to keep it small. The most successful investors and traders will have regular and frequent small losses. Understand that taking small losses is healthy for you. By doing so, it allows you to think more clearly to find new opportunities down the road. If youre hanging onto a losing trade, you will have difficulty thinking clearly to see new opportunities. A quote from Reminiscences of a Stock Operator by Jessie Livormore said it all. Losing money is the least of my troubles. A loss never bothers me after I take it. But being wrong not taking the loss that is what does the damage to the pocketbook and the soul.

To this day, it amazes me how so many people who want to make money in the stock market or want to become day traders come into this business without a plan. What most fail to realize is this is a business. It is no different than any other business looking to make a profit. You cant just sit on the edge of your seat and make money. While the business of investing and trading is risky, it doesnt mean you have to have a gambling mindset. The worst thing any investor or trader can do is stay with a losing trade, hoping it will come back and turn into a winner. This mistake is fatal. Many traders freeze when theyre in a losing position. They think if they stay in the market a few more ticks, maybe it will turn around. Train yourself to use stops to help control risk. Using stops is a necessity to having long-term trading success. Learn to take your loss. You can always get back in when the market turns around.

Investing and trading are based on probabilities. Work with a fixed dollar amount you are willing to lose if wrong. Based on your total account size, figure on anywhere from 3 to 5 percent to risk per trade. To some this is a very conservative amount, but its best to be more conservative than overly aggressive. Learn to use trailing stops once the position moves in your favor to manage your risk more effectively. Take part profits along the way at predetermined points. Yes, you must learn to take profits as well. By doing so you are controlling your risk more effectively and locking in profits. Remember, youre investing or trading to make money. Learn to ring that cash register.

A common mistake by inexperienced investors and traders is they trade without a pre-planned amount to lose if wrong and no plan to lock in profits if correct. That type of action usually results with the investor or trader working on hope and prayer that will eventually run them to failure. Think back to the bull market, when so many stocks were running straight up. Many people got caught up thinking they could do no wrong.

I remember talking to many investors who asked for advice as the stock market climbed higher. I suggested they take part profits along the way and use trailing stops, but greed blinded them into thinking the market has to keep moving higher. One hundred percent, 200 percent, 300 percent and more was not enough. If they sold their stock at a profit, they complained about having to pay taxes on those profits. I often wonder why so many find it easier to hang on to a loser and have a tax write-off rather than happily paying taxes on making profits. Those same people now wish for 10 percent return.

Professional-minded traders know the use of several simple effective techniques would have saved many investors from giving back a majority of their profits or from stopping them from going in the red. The key is learning how to manage your investments no differently than a day trader manages trades. Doing so will help you become a better investor.

To better equip yourself as a trader/investor

Understand how to read a chart properly to see key resistance and support levels.
Understand and know how to identify a trending market and the failure of the trends.
Understand that trading and investing are no different than any other business.
Control your expenses and maximize your profits, otherwise you will be out of business.
Be flexible and adapt to current market conditions.
Learn and accept the fact its ok to be wrong and take the loss.
Learn to take profits when you are in a profitable trade.
When wrong, get out of your position.
When right, scale out and use trailing stops to continue locking in profits if the move continues in your favor.
Keep it simple and remember your downside risk must be less than your upside potential.