Without proper risk management, your trading strategy based on levels, indicators, patterns, etc.will not make any sense. Any trading strategy should be supported by strict risk management, where the maximum allowable losses per transaction and the risk ratio are observed:the profit is always more than 1/2.
You don't have to be right in every trade. It's just that your profit in successful transactions should be greater than the losses in unprofitable transactions. This correct use of risk management will lead you to success.
____________ The example shows one of the real scenarios of any trading system where the rules of risk management are observed:
Deposit of 10,000$ The risk per transaction is -1% (or -100$)
Math is completely wrong. You can't just sum up the percentages. After losing 1% of your account 4 times in a row you will be down to 96.059601% of the starting balance and NOT 96%.
0.99^4 * 1.03 * 0.99^2 * 1.03 * 0.99 * 1.04 * 0.99^3 * 1.04 = 1.03775079316
So after these trades you will be up 3.775079316% and NOT 4%.
This might seem like a small difference but it compounds over time.
DO NOT have a static risk. That is the best way of blowing your account when encountering a losing streak.
charliefornia
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@rf1shrdev, exactly and this is over a 2 year period lol 4% in two years is absolutely laughable ...
GreenCryptoTrades
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@charliefornia, 4% is not over 2 years. where did he mention that?
Nasdaqcritz
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@rf1shrdev, This is somewhat true, however, it takes an expert to know when you can be static. For me, If I increase risk, I just use a tighter stop. Since my system gives high probability trades, It can make up for a few of my losers. This style is not for everyone. But again as mentioned below, In my day trade account, I trade only EURUSD and I only won 25% of my trades last month. That means 3 out of every 4 trades were losses. But because of my money management, I still made money for the month. Again, knowing when to work this way is very important. Knowing when to walk away and shut down is the hardest part in all of this.
Since eyeing my performance analytics from last month, I know there were several days where I over-traded. So in response, this month I vowed to not make as many trades and to have more patience in waiting for the higher probability areas on my charts to be hit.
This week I had 11 trades: 36% win rate. and breakdown of my metric scores:
8.00 (R:R) ratio - 16.09 DR (Disposition average)
4 winning with +$401 Avg. for Wins - Duration 1.1 Days for winners. $1,605 Profit
7 losing with -$50 avg. For loss - Duration 1.6 Hours for my losing trades -$351 Loss
+ $1254 total for the week.
10.2 HR duration average for all trades.
Rayner1212
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@Nasdaqcritz,
u have mentioned that ur system have high probabilty trades...and i assumed u mean it is high prob win rate?
But then ur further explanation described that u have had more losing trades than winning ones.
Do u think it is a bit confusing ?
Super_B_XinR
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@Nasdaqcritz, You don't have to be right in every trade
anwiii
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@rf1shrdev, yea, it looks like he pulled the numbers out of his ass but for example purposes only. the concept is still the same though. it's a little vague as to what strategy he has with a max cap loss at 1% and capping the gains at 3-4%. this didn't seem realistic to me either. i think it a was a good short article for the concept though. risk management plays a HUGE role in trading as i learned later on when i wanted to take my trading to the next level. changed my life so the concept itself is important no matter how vague or "inaccurate"