Market players have an amazing capacity to ignore risk management. Caught in the excitement of the game, limiting risk seems a sure way to miss the next BIG THING. But the importance of this vital task is perfectly clear, even if they choose not to hear: long-term success comes from reducing losses, not increasing gains. While this brief statement defines a straight path to success, the discipline required to take losses efficiently is beyond the capacity of most participants. Perhaps that's why the failure rate for what you're seeking right now is well over 70%.

Greed attracts players to strategies that have the highest failure rates. Danger increases significantly when trading in high-volatility environments. Wide swings ensure that price carries a great distance in a very short time frame, while offering few safe entries and many professional shakeouts. Borderline participants see the upside in these active plays, but ignore the downside when they enter positions into crowd excitement. Whatever happens next is out of their control because they exercise no planning, reward targeting or risk management.

The most important rule of risk management requires little interpretation: never enter a trade without knowing your exit. Each setup generates a risk profile based on the distance between the entry and major S/R violation level (failure target). This failure target determines the point where price action proves that the trade was wrong and should be terminated. This distance must be acceptable before each trade entry and not produce a loss in excess of your predetermined risk tolerance.

Target a permissible average loss as part of your trading plan and rule preparation. Smaller accounts must manage smaller losses than large accounts. Risk tolerance also aligns closely with reward measurement. The distance from the entry to the nearest S/R barrier in the direction of the trade measures reward potential (profit target). Seek positions with profit targets that measure at least 3 times the failure targets. Then estimate the actual dollar loss should the position fail and violate the risk level with the expected number of shares. And don't forget slippage.Your actual cost executing both sides of the trade can be much higher than you expect.

Here's your problem. Risk management rules require that you pass up many trades that will turn a nice profit when you're right. However, the trouble starts when you're wrong. Traders find it very difficult to stand aside when greed takes hold of a promising setup and clouds perception of the loss side. The lure of the gain forces the entry, which then becomes a roll of the dice.

Seek low-risk entry whenever possible. Find setups with entry signals very close to S/R or look for deep pullbacks in well-established trends. Narrow range bars offer safer entry than expansion moves. Spreads narrow and permit swift execution at specific prices in a quieter environment. Consider less volatile markets for strategies. Look for stocks that move in slower motion and offer better opportunities to take appropriate safety measures. Filter time as well as price. The first and last trading hours carry sharp volatility and higher risk. Consider the quieter middle hours to enter new positions or terminate morning trades.

Almost every trader loses more money in a bad trade and has a lower win-loss ratio than the conscious mind will admit. Besides strong discipline, you must maintain objective and current records of your trading activity. Let your spreadsheet or portfolio program determine your success, not your biased and ambitious mind. Never, ever allow your broker to maintain your primary account records for you. They're not your trusted friends and they make frequent recording errors, usually in their own favor. Earned interest in your broker account will also distort your losses. And their monthly records and trade slips don't provide a complete analysis of how YOU trade.