TradeCityPro Academy | Risk Management👋 Welcome to TradeCityPro Channel!
Let’s continue with another training session after the first part, which was about Capital Management, and dive into the important topic of Risk Management.
🕵️♂️ Risk Management as a Profession
One of the heaviest responsibilities, riskiest roles, and most demanding efforts in studying or working in a company lies in the field of Risk Management.
The job of risk management exists in various fields, including banking, insurance, investment, and consulting. People working in this field are responsible for identifying financial, operational, or project-related risks and designing strategies to reduce or manage them.
The income of a risk manager varies depending on the country, industry, level of experience, and scope of the project. In developed countries, risk managers in financial industries can earn high incomes. On average, in the United States, the annual income of a risk manager ranges between $80,000 and $150,000.
💰 Risk Management in Financial Markets
Risk management is one of the most important skills and concepts in the world of finance, business, and even daily life. It helps you identify, assess, and control potential risks to avoid unexpected losses.
💡 What is Risk Management?
Risk management is the process of identifying and assessing potential threats and then taking actions to reduce or eliminate their negative impacts. This process helps you make more informed decisions and protect your capital or resources from unnecessary risks.
In financial markets, risk management means identifying, evaluating, and controlling risks related to investments to prevent major losses. This includes setting a Stop Loss, diversifying your investment portfolio, using leverage responsibly, and sticking to your trading strategy. The primary goal is to preserve capital and optimize profits by managing potential risks.
💵 Why Should We Manage Risk?
Before diving into the explanations, let’s illustrate the concept of risk management with a life example: Do you give the same kind of gift to your parents or partner as you would to a distant relative or a friend you recently met? Of course not! Everyone holds a different level of importance in your life.
Now let’s examine this in financial markets. It’s better to have different risk management strategies for your setups and strategies based on market conditions. Categorize them into different groups using your Excel data and setups.
As a side note, in this training, when we talk about risk, we mean the amount of capital you will lose after entering a position and hitting your stop loss not just the amount of capital involved in the position.
Additionally, if you don’t have a written trading plan, strategies, or if you don’t document your positions in Excel or any other platform, this will not be beneficial for you and may result in future losses.
💼 Implementing Risk Management in Trading
We need to categorize our trades based on market conditions, daily circumstances, chart setups, strategies, win rate, written trading plans, and our trade entry checklist.
Here’s how I categorize trades: Very Risky - Risky - Normal - Confident
1️⃣ Very Risky
For this category, it’s better to have a separate account purely for testing, FOMO, or experiments. These trades have very few confirmations (1–2). Trade with less than 0.1%–0.25% of your main capital in this category.
2️⃣ Risky
These trades are opened in your main account because they generally meet some confirmations but lack key ones. For instance, you anticipate a resistance breakout and go long before confirmation. These trades usually have a small stop loss, leading to higher risk-to-reward ratios. Use 0.25%–0.5% of your capital for these trades.
3️⃣ Normal
These trades have most confirmations but might miss a few. For example, out of 10 items on your checklist, 6–7 are confirmed. These form the majority of trades. Be cautious about the win rate of this category, as it should be higher than your overall average. Use 0.5%–0.75% of your capital here.
4️⃣ Confident
These trades have all major confirmations, and your strategy’s triggers are activated. Additionally, 8–9 out of 10 items on your trade entry checklist are confirmed. These are your most confident trades. Use 0.75%–1% of your capital for these trades.
⚠️ Daily Risk Management
Don’t use your entire daily risk limit at once. For example, if your daily risk is 1.5%, keep some risk in reserve in case your first trade hits its stop loss. This allows you to recover and even profit later in the day.
Focus on normal trades. These should form the majority of your trades since they maintain a healthy win rate. Risky trades might lower your win rate, while confident trades occur less frequently and won’t significantly impact your overall win rate.
📝 Building Risk Management and Consistency
Risk management based on your checklists and spreadsheets can take around 6–8 months to develop, starting after learning technical analysis. In the beginning, allocate 0.5% risk per trade while documenting your trades.
This will prevent unnecessary self-blame for stop-loss hits in risky trades and help you trade confidently with a solid plan.
❤️ Friendly Note
If you don’t follow these principles, trading might become an on-and-off journey, leading to frustration and eventual market exit. In the end, your money will go to traders who adhere to these rules.
If you’ve read this far, congratulations! Unlike misleading social media ads, this guide offers genuine, practical insights. Be proud of your effort and focus on applying these principles. Let’s progress together and elevate our lives through financial markets. 😊
