How To Master Risk
In Financial Markets
Risk is arguably the most underrated topic discussed in market speculation, many traders and investors choose to avoid risk instead of grasping a clear concept of it. Risk is nothing more than a predetermined amount of money that one is willing to put on the line in efforts for a return on investment. Position sizing and risk are two separate things, to make matters simple I will explain the difference using a $10,000.00 sized trading account (For Day/Swing Trading ONLY) You do not want to be trading with money on an equity account or money that is used for living expenses. So set some capital aside for a trading account ONLY. Your risk should be no more than 1-5% of the overall account depending on your risk tolerance (100-500). If I find a setup that I like and want to put on a position, my position size can be 500.00 - 1000.00 dollars with a 30 - 50% stop (150.00 - 500.00 OR 1 - 5 % of total account).
The main reason you want to predetermine your risk upfront prior to putting on a trade is that it allows you to take focus off your P/L and focus on the price action solely, our mantra is process over profits, as a byproduct of trading with a system, which is defined as a clear plan of entry with use of a trading edge, a stop loss and targets on where to take profit. There is very little to no reason to be stopped out early of a proper trade plan, unless you are gambling and lack risk management skills. More than half of you reading this have been in a situation where you stopped out due to a small fluctuation in your paper profits, and once you sell back to the market, the market goes in your direction. You can avoid this with a predetermined stop loss of -30 to -50% with a small 1-5% of your trading account and letting the price action play out without bias or emotion interfering with the trade.
The market owes you and I absolutely nothing, so once a trade goes in our favor, the smartest and safest approach is to set a Trailing Stop Loss, this implies your stop is trailing the price action, if your original stop was -50% you can now raise it to -30-20% OR Set a 15-25% Trailing Stop. This will not only protect your gains, but will allow you to stay in winning trades longer as price continues to go in your favor. You have now limited risk from original -50% to a breakeven or +15-25% Profit using a TRLSTP Order.
The same approach applies to your trading account if you see gains or loss, if your trading account is now 15,000.00 from the original 10,000.00 your risk has not changed from the predetermined 1-5% per trade. Instead of risking 100-500 you now have 150 - 750 to risk per trade. The process should be repeated in every trade setup, if you have high conviction, then it is best to go with the 5% trade of the total account, and if conviction is low then you should plan to go with a 1% total account trade. The goal is to completely eliminate bias and emotion when trading in real time with real capital, the main goal is and always should be the process and the price action of the chart.
Risk is not something to be worried or scared of, if you know exactly how much you are willing to lose upfront then there is no reason to get scared out of a trade or FOMO into a bad position.
If you enjoyed this publishing please give me your thoughts and questions in the comments below. Thank you and Good Luck.
Nice Thanks!
Great blog!