Does Risk Management Really Matter In Trading?
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Transcript of Does Risk Management Really Matter In Trading?
Focusing on risk management can
be a completegame changer
The numbers do not lie
You may already understand how vital managing your risk is
Why you should focus on risk management
How you can lessen the impact of losing
streaks/draw downs
After fully understanding those…
How to calculate your position size
The simple step you can take so you
never forget about risk
RISK MANAGEMENT IS YOUR FIRST JOB
The more risk, the greater the potential
reward
Taking this principle to its extreme has been the downfall of many inexperienced traders
The primary goal of trading is to protect
the capital
Trading capital is the lifeblood of your trading business
One risk sizedoes not fit all
Trading is all about your probability of
survival
These are losing streaks, losing trades
in a row
Bad News
WINNING STREAKS/ LOSING STREAKS
COME IN A RANDOM DISTRIBUTION
WWWWWLLWWW
WWLLLLLWLL
Think about the different types of trading systems
Trending
Channel
It's natural that winners and losers should come in
clusters
Once or twice a year you will likely see one of these eight to nine trade losing streaks
CAN YOU RECOVER FROM A STRING OF LOSING TRADES?
Initial: $10,000 After Loss: $9,500Need: 5.3% over that $9,500 to get back to $10,000
Account draws down 10%?
You need to make 11% on remaining balance
25%?You need to make
33%
50%?You need to double
the size of your remaining account
Consider a scenario where on every trade you are risking 5%
during the 1% probability losing streak!
If your account has gone down 40%, you need to make 67%on the remaining
balance!
What if you used a lower risk %?
Your account is eminently survivable
WHAT IS EFFECTIVE RISK MANAGEMENT?
1. RISK PER TRADE
2. DAILY OR WEEKLY CIRCUIT BREAKER
You will find that there are days and weeks
when the markets are simply not cooperating
Go back to that probabilities table
You need to look at this in terms of recover-ability
Set the circuit breaker large enough so that it can accommodate the normal fluctuations
If you're down 10% of your account in one day, you know that
you can recover relatively easy
3. MAXIMUM DRAW DOWN YOU ARE
WILLING TO TAKE
You need to have in mind a maximum
draw down level for your total account
You have to redo your homework
You must redo your analysis
It's time to take a fresh look at your trading system &
consider changes to it
Consider changes to the instruments you
are trading
Consider changes to the time frames you
are trading
This will in all likelihood be a relatively large
number
How much?How large?
How much of a loss will I accept before reassessing
my trading business?
Determine your average risk per trade
Let's assume in our example that the
average losing trade for your system is $200 per trade.
account sizex
risk %/
average lossx
price per tick
We talked earlier about 2% - 5% risk
With a 1% risk, you can survive many
storms
The flip side of the 1% risk is that you will not
be able to make as much money on each
trade
You always have that balance between how
much risk you are willing to assume versus how
aggressively you want to pursue gains
Failure to respect risk will kill you
Resist the temptation and focus on risk
management
4 STEPS TO BEING A RISK MANAGER
Before you trade, decide how much
you're going to risk
Determine your circuit breaker level
Determine your draw down size
Write it all down!
VITAL