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Risk!!!

Using Risk Management to Not Lose Money Risk Management In this article we are going to talk about the most exciting topic of risk management! Sarcasm aside, this is probably the single most important lesson that any trader or investor can ever learn. Warren Buffett famously said: "Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1." So, if it is good enough for the most successful investor of all time, it is good enough to write a post about. Now, this quote does not apply to every single trade; no one trades without taking losses. But this is more about mindset, how to strategize, and your performance overall. In fact, with what you are about to learn, you will see that it is actually possible to lose more trades than you win while STILL being a profitable trader. We will get to the actual math/strategy in a moment. First, a short word about psychology. Nothing makes a trader lose more money than not having a well thought out plan or not sticking to it. We need to make our strategy first so that we can do it logically, and without emotion. This is easier to do beforehand because we haven’t actually put any money in the market yet. So, what is it that we need to know? What is my total account size? What am I willing to lose per trade? What is my Stop Loss? What is my Position Size? What is my Risk to Reward Ratio? If you cannot answer these questions then it is not a good idea to click the “buy” button! Unless you just want to gamble and throw money away. Question 1 - What is my total account size? Probably the easiest question for you to answer. Account size is the amount of money that you have in the market. Personally, I like to split my total account size into two parts. One part for longer term HODLing. One part for short-mid term swing trading. For my calculations, I forget about the HODL account and only look at the money in the trading account. I personally do not day trade. If I get into a position, I expect to be in it for 1-4 weeks. Obviously, this rule is flexible based on market conditions. Question 2 - What am I willing to lose per trade? This one is a bit more subjective because it comes down to how risk averse you are. It is generally accepted that you should risk between 1-5% of your account per trade. For me, anything above 3% is higher than I like, so I stick to 1-2% and sometimes 3. So, if you have a trading account of $10,000 and you want to risk 1%, you are risking $100: $10,000 x .01 = $100 To be clear – Risking 1% of your account does NOT mean using 1% of your account each trade. You are not spending $100 on each trade. Risk =/= position size. Risking 1% means that if your Stop Loss gets hit you lose $100. Question 3 - What is my Stop Loss? Firstly, what is a Stop Loss? A Stop Loss is an order that is placed to automatically close you out of a position should the price be hit. You should place your Stop Loss order right after you open your position. This is also a good time to place another order to close out your position at your target price. But where do you put the Stop Loss? A Stop Loss is best placed at a price that invalidates the reason you got into the trade in the first place. Sometimes this is, very creatively, called the “Invalidation Level”. For example, if you are trading a breakout to the upside, and then the price of your crypto shoots down in the other direction past your support levels, it is no longer a breakout and you should exit the position. To restate this in a different way, this level should not be arbitrary. There is no reason to automatically put your Stop Loss at 6.7138%, or any other random number, of your entry. The level you chose should be based on Technical Indicators; like a base of support, a Fibonacci level, or a previous high. This is because the market does not care about your arbitrary values. The market is made up of people and whales (who, believe it or not, are also people), and they, the ‘Market’, care about TA. Here is another example of a more short term trade to the downside. You could be more aggressive with the Price Target considering the resistance was so weak, but this is just an example to illustrate my point. (MACD looks nice there too. Learn more about that HERE ) Question 4 - What is my position size? In order to calculate position size we need to know a two different things: Risk Per Trade - 1 to 5% Distance from entry to the Stop Loss in percentage terms So the equation is Position Size = (Total Trading Account Size X Risk Percentage)/Distance to Stop Loss from entry For example, if you have a $10,000 account and you want to risk 2% while your Stop Loss is 10% away from your entry: ($10,000 X .02)/.1 = $2,000 Position Size while only risking $200. One thing to note here is that the closer your Stop Loss is to your entry, the larger Position Size you can trade with. So if you move the stop up to 5% away from your entry: ($10,000 X .02)/.05 = $4,000 Position Size while still only risking $200. Naturally, a larger position gives you more potential profit. (Don’t take this to mean use margin. I personally don’t use margin for Crypto and would recommend that most people don’t either.) Now that we have the position size, we should determine if the trade is worth getting into by finding your Risk to Reward Ratio. Question 5 - What is My Risk to Reward Ratio? The Risk Reward Ratio, sometimes simply known as R, is the ratio between your potential profit and potential loss. Reward/Risk = R So if you open a position where you can potentially lose $100, and you can potentially profit $300, then your trade has an R of 3. If you click on the Long or Short Position button in TradingView, you can move the sliders up and down and see what your R will be in real time. Double clicking on this will take you to the settings where you can input exact values. Since you set your Stop Loss at a logical point, one based on TA and not a whim, you should do the same with your Price Target. So why is having a high and, more importantly, realistic R a good thing? Because then you can actually lose MORE trades than you win and STILL be profitable. If you know your average R you can easily calculate the minimum win rate you must have to stay profitable over the long term: (1 / (1+R)) X 100 Let’s say your average R per trade is 2.5: (1/(1+2.5)) X 100 = 28.5% Meaning that you only need to win 28.5% of the time to not lose money overall. Because of the nature of this equation as your R increases, your required winrate to stay profitable decreases. Final Thoughts So, now that you have asked yourself, and have answered, the five big questions you are ready to open a trade. Remember why we do this. We should not expect to win every trade. But you must set yourself up so that when you do lose there is minimal damage to your account. Understanding the basics of Risk Management is the tool you need to keep your losses small, and account intact. Please let me know if you have any questions and if you like it, please hit the thumbs up and be sure to follow for more! Links to my Fibonacci Retracement, RSI, and MACD guides are below. Give them a read for more information!
Editors' picks
BITSTAMP:BTCUSDEducation
by zsamochin
55
Is the economy going to hit a wall?The problem with the worlds economies reopening now is the stock markets already priced in the reopening over the past year with lower inflation numbers and massive QE. How do the markets avoid hitting this inflation wall? Fed says it's "transitory", is there enough QE left to jump this wall? How does one chart "transition" with indicators? Ever chart I pull up is overbought, has to much debt and highly speculative based on future earnings. Leverage is at an all time high along with the S&P. Yields are approaching the limit they will stretch.
CBOE:VIX3M
by SPYvsGME
1
No its not a picture of Mickey Mouse...🐭It's a super clear diagram on what key ingredients you need to find the 'sweet spot' = profitability. The thing is, most people are desperately hunting for the holy-grail, you know - that 100% winning strategy... the silver bullet. It doesn't exist - I'm sorry. 😢 So even a profitable strategy that's awesome can blow your account if the other 'factors' are not considered.... Greed and risk management. With poor risk management you can blow your account on a profitable strategy. Much like if the casino didn't set a trade limit - they could go bust if a gambler got 'lucky' - because its the casino that has the mathematical 'edge', right? You must factor in your losing runs to ensure you not exposing your account to the 'risk of ruin'. So yeah a profitable 'edge' is key, but without managing your mindset and using effective risk management, its actually useless too. Having an understanding of probability is fine too - but if you don't execute your 'edge' or if you don't have one, you won't be profitable too. And lastly, yeah - you can have your risk management nailed on - but if you've not got a profitable edge too, you'll lose money. Just less money. You could absorb 500 consecutive losses on a £1000 account at 1% risk per trade, but you'd only have about £6 left. Your strategy would have to be really poor for that to happen! But you catch my drift, that effective risk management is vital. So in summary, you need these three key ingredients... Strategy with an Edge Effective Risk Management planning for probability Trading Psychology - (greed under control, no fear, discipline, resilience, etc) You can't get to the 'sweet spot' without all 3 being in perfect alignment. Good luck. Darren If this helps - please show me by liking this post if you can, its appreciated and I'll do more like this 😎
Education
by pow_removetheguesswork
3
Statistical approach to risk management - Python scriptThis script can be used to approximate a strategy, and find optimal leverage. The output will consist of two columns, one for the median account size at end of trading, and one for the share of accounts liquidated. The script assumes a 100% position size for the account. This does not take into account size deviations for earnings and losses, so use with a grain of salt if your positions vary greatly in that aspect. Code preview cdn.discordapp.com/attachments/592684708551327764/848701541766529034/carbon.png TradingView does not allow posting external links until you've reached a specific reputation, so i can't use the url feature Input explanation WINRATE : chance of winning trade AVGWIN : average earning per winning trade AVGLOSS : average loss per losing trade MAX_LEVERAGE : maximum leverage available to you TRADES : how many trades per account you want to simulate ACCOUNTS : how many accounts you want to simulate the inputs used in the source code are from one of my older strategies, change them to suit your algorithm Source code pastebin.com/69EKdVFC Good luck, Have fun -Vin
VEducation
by Vindruee
BTC WILL BOUNCE ON JUNE ? We are on a simetric triangle that could be bullish or bearish, I'm bullish since we have higher lows. - We don't have much volume since the CME Globex Trading Schedule is on Holidays for Memorial Day (28 May - 1 June 2021) - The action price looks clever, the miners keeps holding. - Project Jasper is developing a new way of payments allowing works with bitcoin. - Investors and institutions started to invest in BTC. - Could be the end of wyckoff. - ADX is bullish/range since not have force enouth - Weekly RSI : 44 - Daily RSI : 32 Conditionals: - Hold the 30k -33k triangle. - Hold the 30k support. Bearish scenario. - Current behavior from Long-Term Holders and Short-Term Holders only resembles two other times: 2018 bear market & 2013 consolidation between double pumps - If we lose 30k - 29k Support we could reach 20k - 19k and then bounce. Things to consider: - Montly candle is the key for the possible scenario. - The volume will start 2 - 3 June. - Big meeting of BTC : Bitcoin Conference 2021 (4 - 5 June) - Goldman Sachs changed opinion about BTC. - Chinesse Mining Enterprises are considering move to EU and USA mostly, which is not great for the crypto but maybe for the price because big institutions will get more confident since the goberments start to dig and tax the mining and have better control of exchanges.
Long
by awstian
USOIL 6-1 Retrace ShortWith summer quickly approaching the initiative in the oil market has changed with more aggressive bids similar to what was seen in December of last year. With inflationary conditions in the market becoming evident and supply chain issues causing major ruptures across many markets I still have very a bullish outlook on Oil. That being said, I also expect for a retrace before a continuation higher next month for Oil. This end of month unwind is not uncommon as contracts are rolled, settled and options approach expiration. My ideal target for this trade would be 64.70 where auctioning really picked up in the past 10 days for oil which offers a 6-1. I placed my stops above highs to prevent any impulse move from causing unwanted drawdowns. Feel free to share your opinions and refer to my other post for longer term projections.
TVC:USOILShort
by crawfordpaul
BTC is now 1:1 value with the DJI where do we go from hereSo got a nice line up for tonight bitcoin and the down jones are an even bet right now at 1:1 you can by one bitcoin or one issue of DJI both cost the same, but do both have the same future profit potential ahhhh now you can see why they want you to see cryptos as dangerous and a failure, the Feds have been talking down bitcoin along with other governments while they are all taking steps to turn their own currencies into crypto.... mean while companies that house crypto exchanges are setting the ground work for regulation from the feds this has split the crypto market in half one half is regulated through exchanges and the other half through digital wallets, privacy coins and subnets
OANDA:BTCUSDLong
by RobinhoodFX
We are in 27%+ on spot so far If you followed my activity probably you now that we managed to short the top of the market, and we bought back the bottom as well. The market bounced from out long position and our community members managed to gain 27% on spot so far, we also set a break even stop just in case of a surprise event, but we do not expect any major pullback until we will reach the 58-60k levels. Some of our latest results: ETH: short: 4320$ stop out 4454$ ---> 1st target 2500$ ----> 2nd target 2000$ profit(spot):52% | profit(5xLeverage): 258% BTC: short 51k$ stop out 52k$ --->Profit: 240% (5xleverage) ------> 1st target: 33k$ ------> 2nd target 30k$ Open long: 33k$ -31k$ ---> stop out 29250$. ----(Modified to break even: now we are risk of from the bottom) Pending: 1st target: 55k 2nd target: 58-60k Thank you guy being a member of our community! community.protradersnetwork.com
Long
by tmsarn
GOLD 200DAY / 1,800 RETEST provides a compelling opportunityOne has to imagine that gold will find its way back to its 200 day before marching on higher given the fundamental tailwinds. If gold trades down to 1800 and we get a nice close above it - I would believe this to be a compelling opportunity to get long or add length if you took a more aggressive entry prior to the breakout. A change in market sentiment with respect to the USD, or a FED hiking cycle beginning sooner than anticipated (or the anticipation thereof) , would act as a circuit breaker to this trade. PDC
OANDA:XAUUSDLong
by Parkdale-Capital
Ethereum Rebound to 3700 in trend channel - See it!Dear traders, A picture says more than a thousand words. You see here the hourly chart of Ethereum and we have just made a double bottom, reached the bottom of the trend channel and are heavily oversold. It's time for a short recovery in my opinion. Prices never go down in a straight line but they do go down in a saw tooth pattern. Let me be clear, I am not bullish anymore for this moment on Ethereum but for the short term I see a possible rebound to around 3700 / 3800. As a trader and investor, I believe more in the value of Bitcoin. Simply because the circulation is limited to maximum 21 million coins while with Etereum it is unlimited. Yes there can be mined coins as much as they want. One can just change the algorithm there. Not with Bitcoin because the maximum is already known. What they do is halving Bitcoin every 4 years. You can read about it on the internet. It means that the degree of difficulty is doubled. This means that mining can continue for a very long time with very powerful and expensive equipment that quickly becomes obsolete... That mining is necessary to validate the payment transactions on the blockchain. Because it takes more power each time to mine, Bitcoin does need to get more expensive to get out of the cost as a miner. I know this because I was a miner myself but changed because trading is better and less risky. If Bitcoin starts to rise faster than the ALTS we are also going to see a correction in those ALTS but that all remains to be seen. That is the Bitcoin dominance. It is important to trade what you see and not what you think! Patterns change all the time and you need to adopt you to the new situation. You need to be able toswitch from long to short and vice versa without hesitation. This market is volatile and goes fast up/ down. Don't run behind prices because often you are too late. Better plan your trades at the lower boundery of trenchannels for longs and simular techniques. Than you can make better profits with less risk. Risk management is everything! Traders, this is purely my personal idea about Ethereum /ETH and not an investment or trading advice! As a trader you should always do your own research and protect your capital with money management. The famous 1% rule or you risk to get to a zero account. With the 1% max loss per trade rule you can trade for a very long time. Do also not overtrade! If you guys appreciate my work it will be a motivation for me if julle give a thumbs up and follow me for updates. Wish you all great and safe trading with lot of profits! Take care!
Long
by PegasusTechCharts
29
DOGEUSD - STILL NOT ENOUGH SUPPORTYesterday I shared my opinion about the price evolution of Doge. Today I will share you my pending position on Doge as well. Yesterday I told you that there is an opportunity to buy from 0.40$. If you did that, congrats to you, but you can buy from 0.25 ( that means nearly 50% discount from current price). Right now I am planning to play with the hype, but only from fundamental values. BTC is still in a corrective move, the market need to kick out the weak hands. If you want to play safe, you can use my setup in order to have a profitable and low risk reward trade. (Max loss on this trade -9% expected profit +290% - since DOGE is a highly speculative coin I had to increase my SL level to 9-10% in order to survive the correction). See the charts attached below: Consider to join our community to get more of this kind for Free. community.protradersnetwork.com #forextrader #forex #forextrading #forexsignals #forexlifestyle #trading #money #cryptocurrency #trader #bitcoin #forexmarket #forexlife #technicalanalysis #stockmarket #forexanalysis #forexmentor #daytrading #forexgroup
Long
by tmsarn
2