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In this episode of the Desire to Trade Podcast, Michael Toma, a seasoned risk consultant and trader, dives into the often-overlooked yet crucial element of trading: risk management. Michael has spent over two decades advising Wall Street firms and insurance companies, and his wealth of knowledge makes him a go-to expert in the field. He reveals how the principles of corporate risk management can be applied to the individual trader’s business, making trading not just a series of lucky bets but a calculated, sustainable pursuit.
In this post, you’ll learn the key components of risk management—identification, assessment, and control—and how they apply to both your trades and your overall trading business. Michael walks through the importance of position sizing, setting stop losses, and staying compliant with your trading plan. He emphasizes the balance between risk and reward and how following a structured, methodical approach can lead to long-term success in trading, rather than short-term wins driven by emotion and randomness.
Michael Toma Playbook & Strategy: How He Actually Trades
Risk Management: The Foundation of Michael’s Strategy
Michael views risk management as the backbone of successful trading. For him, trading isn’t just about picking the right trades—it’s about managing the business of trading itself. This involves identifying risks, assessing them, and then taking actions to control them.
Here’s how Michael handles risk in his trading business:
- Identify Risks: Always be aware of the potential risks in every trade. It’s not just about losing money on a single trade but also about the impact on your overall business as a trader.
- Assess Risks: Once you’ve identified the risks, evaluate their potential impact. Can you absorb the loss? How will it affect your account or trading plan?
- Control Risks: Once risks are identified and assessed, take steps to minimize or control them. This could involve using stop losses, adjusting position sizes, or cutting trades that don’t align with your strategy.
- Protect Your Business: Michael stresses that it’s not just about protecting individual trades, but protecting your overall trading business. Think of your trading account as a company, and your goal is to keep it running in the long term without risking everything on one trade.
Position Sizing: How Michael Keeps Losses Manageable
One of the key rules in Michael’s strategy is position sizing. He believes that position size should not be based on the perceived probability of a trade, but rather on the amount of risk you’re willing to take on each trade.
Here’s how Michael approaches position sizing:
- Start Small: Regardless of how confident you feel about a trade, start with a small position. Even if you believe a trade has a high probability of success, keep your position size conservative.
- Increase Gradually: As you gain experience and your trading becomes more consistent, you can gradually increase your position size. However, always do so in a controlled manner.
- Don’t Chase Large Wins: Avoid the temptation to load up on a trade just because you believe it will be profitable. Let your consistent, smaller positions build over time.
- Use a “Graduation Plan”: Michael has a system where he doesn’t increase position size until he has proven success. Think of it as earning the right to increase your position size based on past performance.
Stop Losses: Where to Place Them
For Michael, stop losses are essential in protecting your trading business, but they need to be set in a way that makes sense for each trade. He doesn’t just place stops based on how much he’s willing to lose, but rather at a level that indicates the trade is no longer valid.
Here’s how Michael sets his stops:
- Don’t Focus on Dollar Amount: Don’t place your stop loss based on how much money you’re willing to lose on a trade. Instead, place your stop where the market tells you that you were wrong.
- Use Logical Levels: Michael uses market profile and price action to determine where to place his stops. For example, he might place a stop above the previous day’s high or low, or at a significant price point where the market’s direction has changed.
- Protect Your Business: The stop loss should be there to protect the longevity of your trading business, not just to limit losses on a single trade. If the market breaks a key level, it signals that the trade idea was wrong.
- Avoid Emotional Stops: Michael warns against emotional decision-making when setting stops. The key is to stick with your plan and let the market dictate when your trade is no longer valid.
Risk and Reward: Balancing the Two
Michael emphasizes that trading is not just about making money—it’s about managing risk and making consistent, calculated decisions. He believes that you should never risk too much on any single trade, no matter how confident you are.
Here’s how to think about risk and reward in your trades:
- Limit Your Losses: Always limit the amount you’re willing to lose on any trade. Michael suggests focusing on managing risk rather than trying to maximize reward on any individual trade.
- Be Patient for Bigger Profits: Success in trading doesn’t come from trying to hit big home runs with every trade. It comes from consistently taking small, calculated trades that add up over time.
- Consider the Long-Term: Michael’s approach to risk and reward is about the long-term. Think of every trade as a part of your trading business, not just a single profit or loss. Each decision should be made with the overall health of your trading account in mind.
- Trade with the Market, Not Against It: Michael advocates for a fading strategy—trading against extreme moves when the market is exhausted. This mindset helps him stay in trades longer and avoid chasing moves that are about to reverse.
Trading Psychology: The Right Mindset for Success
Michael places a huge emphasis on mindset, and he believes that having a balanced life is essential for being a successful trader. He has seen firsthand how important it is to maintain emotional and psychological balance to trade effectively.
Here’s how to approach the psychological side of trading:
- Don’t Let Emotions Drive Decisions: Trading based on emotions leads to impulsive decisions. Stick to your plan and focus on executing it effectively, regardless of market noise.
- Avoid Overtrading: Trading out of boredom or frustration often leads to poor decisions. Michael advises traders to stick to their plan and avoid entering trades just to “do something” in the market.
- Keep It Simple: Michael advocates for simplicity in trading. Focus on the basics and avoid overcomplicating your strategy. Let the market come to you rather than trying to force trades.
- Reward Yourself for Compliance: Michael rewards himself for sticking to his trading plan, even if the results aren’t immediately profitable. This helps him maintain discipline and stay on track with his strategy.
The Power of Risk Management: Protecting Your Trading Business
In his interview, Michael Toma emphasizes that risk management is the cornerstone of any successful trading strategy. According to Michael, trading is not just about making profits on individual trades but about managing your trading business over the long term. He defines risk management as identifying, assessing, and controlling risks that could affect not just one trade but your entire trading career. For Michael, the key is to always be mindful of the risks in every decision you make, whether that’s the potential loss on a trade or the impact of poor decisions on your overall business as a trader.
Michael further highlights that risk management should be viewed as a continuous process. It’s not just about using stop losses or adjusting position sizes; it’s about ensuring that every trade is made with a clear understanding of the risk involved. By applying a structured risk management approach, traders can avoid catastrophic losses that could wipe out their account. Michael’s process of identifying risks, assessing their potential impact, and then controlling them through smart decision-making is a mindset every trader should adopt to maintain long-term profitability.
Position Sizing for Consistency: Starting Small, Graduating Gradually
Michael Toma’s approach to position sizing is centered around maintaining consistency and managing risk. He advises traders to start small, regardless of how confident they feel about a trade, and gradually increase position size as they gain experience and success. This approach minimizes the potential impact of any single loss and ensures that traders don’t overexpose themselves in any one trade. By beginning with smaller positions, you allow room for mistakes and learning, while still maintaining control over your risk exposure.
Michael also emphasizes the importance of a “graduation plan” for increasing position sizes. Rather than increasing position size based on gut feeling or the perceived success of a trade, he suggests doing so only after proving consistent success. For example, once you’ve had a certain number of wins or a specific win-loss ratio, you can begin to scale up your positions. This approach ensures that growth in position size is based on results, not emotions or greed, and helps keep your trading business sustainable over time. By sticking to a disciplined position sizing strategy, traders can avoid the common trap of betting too big on a single trade and instead build a steady path to long-term success.
Stop Losses: Placing Them Where the Market Tells You You’re Wrong
Michael Toma takes a unique perspective on stop losses that deviates from the traditional view. Instead of setting stop losses based solely on how much you’re willing to lose on a trade, he advocates for placing them at key technical levels where the market tells you that the trade idea is no longer valid. For Michael, a stop loss should reflect a logical point on the chart—such as above or below a significant high or low or at a key market profile level—rather than just a dollar amount. This ensures that your stop loss is based on the market’s structure and movement, not just your own risk tolerance.
By focusing on market-driven stop losses, Michael aims to reduce the emotional impact of losing trades. He emphasizes that traders shouldn’t be overly focused on the dollar risk, but rather on whether the trade is working according to the market’s behavior. This approach helps traders stick to their strategy without panicking over minor fluctuations. Michael also suggests that placing stops in this way can often lead to staying in trades longer, letting them develop and hit their targets, while still protecting your capital if the market moves against you. Ultimately, it’s about letting the market dictate when you’re wrong, rather than relying on arbitrary dollar limits.
Managing Risk and Reward: How to Avoid Chasing Big Wins
Michael Toma believes that trading is not about chasing huge wins but about managing the balance between risk and reward in a way that preserves your trading business. He stresses that many traders fall into the trap of seeking big profits on every trade, which often leads to overtrading or taking on excessive risk. Instead, Michael advises focusing on consistent, smaller wins that add up over time. By maintaining a controlled risk-to-reward ratio, traders can avoid the emotional highs and lows of chasing after the next big trade, leading to more sustainable profits.
For Michael, the key to long-term success is not in hitting a “home run” with every trade but in making calculated decisions based on a structured risk management plan. He advocates for sticking to your strategy, even when a trade doesn’t offer the biggest potential reward. This disciplined approach prevents traders from getting distracted by the desire for quick gains and instead allows them to focus on the process of trading. By focusing on controlled risk and steady progress, traders can steadily build their accounts while minimizing the likelihood of catastrophic losses.
The Trader’s Mindset: Balancing Your Life for Better Trading Results
Michael Toma places a significant emphasis on the psychological side of trading, which he believes is just as important as the technical and strategic aspects. According to Michael, achieving success in trading isn’t only about having the right strategy; it’s about maintaining balance in your personal life. He shares that having a stable, well-rounded life outside of trading helps him stay calm, focused, and clear-headed when making decisions in the market. This balance is what keeps him from reacting impulsively to market fluctuations and allows him to follow his plan with discipline.
Michael’s mindset is rooted in the idea that when you have balance in your life, you’re more likely to perform better as a trader. He explains that when he’s at peace in other areas of life—whether with family, health, or personal activities—his trading results tend to improve as well. Trading can be a highly isolating and emotionally intense activity, but by maintaining balance, Michael avoids falling into the traps of overtrading or making decisions driven by frustration or greed. He encourages traders to build a lifestyle that supports their trading, allowing them to stay grounded and perform at their best when it matters most.
Michael Toma’s approach to trading is a comprehensive blend of risk management, disciplined position sizing, and maintaining a balanced mindset. His core philosophy revolves around treating trading as a business, not just a series of isolated trades. The key lesson is clear: success in trading doesn’t come from chasing big wins but from consistently managing risk, protecting your trading capital, and executing your plan with precision.
Toma’s method of risk management goes beyond traditional stop losses, focusing on identifying risks in every trade and assessing their potential impact on the overall trading business. He advocates for starting with small position sizes and gradually increasing them only after proving consistent success. This graduated approach helps traders avoid overexposure and keeps them on a steady path toward profitability. His advice on stop losses emphasizes using logical, market-driven levels, ensuring that traders stay in trades longer and cut them when the market signals they’re wrong.
In addition to these tactical elements, Michael stresses the importance of mindset. By maintaining a balanced life outside of trading, traders can improve their performance and avoid impulsive decisions driven by emotion. Toma’s strategy is all about process discipline—focusing on the long-term success of your trading business and not getting distracted by the desire for quick gains. Whether it’s following a structured risk management plan or keeping emotions in check, Michael Toma’s approach offers valuable insights for traders looking to build a sustainable, profitable career in the markets.
