Market volatility, as we are currently experiencing, has a tendency to have traders rethink their rules, or at least question them. Normally, when the markets are unsettled, there is some uncertainty and it is normal to question your methods. In fact, this may be a time to pull in and lower your exposure to market volatility by reducing your position sizes. This will help you control your emotions and reduce your trading anxiety.

In April 1956, the cargo ship, first of its kind, departed the dock at Port Newark for the Port of Houston. It was the Ideal X – the world’s first container ship. This ship was loaded with steel boxes, the brainchild of self-made transportation tycoon, Malcolm McLean. He watched the inefficient process of loading and unloading individual cargo and realized that sealing cargo into standardized containers increased the amount of cargo carried, with much less handling required. Ships bearing the name of his company, Sealand, can be seen on all the oceans of the world.

So, what does this story have to do with trading? Just like the efficient container cargo ship, which uses standardized containers for very efficient and profitable shipping, if we can think of trading, with many small, fixed-risk trades, using a system with very defined and repeatable entry and exit rules and specific risk management rules, we will have more efficient and profitable trading in the long run.

One big problem with many traders, especially newer traders, is the constant desire to have “killer” trades. This leads to larger sizes than is prudent. Remember, there is no perfect system without any losses; it doesn’t exist, no matter what the ads say. We are going to have loses, that is a fact of trading.

Therefore, risk management is a critical element of any successful trader’s system. With good risk management, we are more likely to control the emotions that come with trading and put ourselves in a better position to be profitable. Like the many containers on the ship, many small consistent trades spread your risk out, instead of putting too much money into fewer, larger positions, which may go against you and put your entire account at too much risk. Keeping your position sizes small, with only 1-2% risk per trade, will keep your individual positions small and your risk at an acceptable level. By placing stop losses on each and every trade, you can limit the risk per trade. In addition to small position sizing, you should limit the total trades you have at any one time to 5 or so positions, which will never allow your total risk to exceed 10% at any one given time, even if all of the positions go against you all at once. You need to live with the possibility, each time you trade, that each trade could be a loser; therefore, you need to be aware of the specific percentage risk you are taking with each position.

Just like the consistency that the fixed size containers brought to the shipping industry, consistency using a specific method and risk management rules is the key to successful trading. The trader that sticks to a specific set of risk rules and controlled emotions has the best chance of success and trading well over the long haul.