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Risk Management | A Thread:
Ahh risk management, the thing that separates trading from gambling.
Don’t like managing risk? Go to Vegas, your odds are better there.
Anyways, risk management is the single most important aspect of trading, here’s why:
1/
Ahh risk management, the thing that separates trading from gambling.
Don’t like managing risk? Go to Vegas, your odds are better there.
Anyways, risk management is the single most important aspect of trading, here’s why:
1/
No matter how “good” you are, you will have losses. You will have losing streaks. You will have days, weeks, months where you can’t seem to catch a winning trade. If you trade long enough, this WILL happen
You need to be able to survive those times
2/
You need to be able to survive those times
2/
Risk management is **NOT** how much you “feel” comfortable losing- it is simple statistics. In order to be profitable over time, you need:
1. A positive statistical expectancy
2. A low RoR (risk of ruin)
(Google these for formulas to calculate)
3/
1. A positive statistical expectancy
2. A low RoR (risk of ruin)
(Google these for formulas to calculate)
3/
Your win rate, average win % and average loss % determine your long term expectancy
It doesn’t matter what your win rate is as long as you are statistically profitable... for example:
Your win rate is 75%
Your avg win is $1
Your avg loss is $5
You are NOT profitable
4/
It doesn’t matter what your win rate is as long as you are statistically profitable... for example:
Your win rate is 75%
Your avg win is $1
Your avg loss is $5
You are NOT profitable
4/
Example B:
Your win rate is 33%
Your avg win is $5
Your avg loss is $2
You ARE profitable
5/
Your win rate is 33%
Your avg win is $5
Your avg loss is $2
You ARE profitable
5/
Risk of ruin:
Finding a system that allows you to be statistically profitable is step 1, step 2 is risk of ruin. Aka ensuring you can survive a “losing streak”
You may be profitable, but if you blow an account after 5 losses in a row, profitability is useless (you’re broke)
6/
Finding a system that allows you to be statistically profitable is step 1, step 2 is risk of ruin. Aka ensuring you can survive a “losing streak”
You may be profitable, but if you blow an account after 5 losses in a row, profitability is useless (you’re broke)
6/
Your risk per trade determines RoR (along with the profitability stats).
If you are risking 20% of your acct per trade, you can only have 5 Ls in a row... so you better be accurate AF
Risk 5% per trade? Now you can take 20Ls in a row... which is fairly avoidable
7/
If you are risking 20% of your acct per trade, you can only have 5 Ls in a row... so you better be accurate AF
Risk 5% per trade? Now you can take 20Ls in a row... which is fairly avoidable
7/
Summary:
Risk management isn’t a “feeling” it is math. Repeatable statistics.
Know your numbers. Know what you need to do to become/stay profitable.
The end
Risk management isn’t a “feeling” it is math. Repeatable statistics.
Know your numbers. Know what you need to do to become/stay profitable.
The end
