Risk Management Examples - Know Your Risks (Part 2)

Why don't we use the entire portfolio?

Risk management helps reduce losses. It also helps protect traders’ accounts from losing all their funds. This is a prerequisite for success but is often overlooked. People who often lose their positions often say that contract trading is like a casino, but for me, if I control my risks well, my positions will always exist. The most important of these is - don't use your entire portfolio. Day traders should follow the so-called one percent rule, which states that you should not put more than 5% of your trading account into trades. So, if you have $10,000 in your trading account, your position on any given instrument should not exceed $500. When the trading loss reaches this level, you should stop the loss decisively. Ed Seykota said: There are three rules to follow for successful trading. Each rule is "stop loss" and never risk losing more than 1% of your portfolio on any single trade. In this way, you can suffer a series of losses.

A 10% drawdown in a trading account can be overcome with a profitable trading strategy. But the larger the retracement, the more difficult it will be to rebound. If you lose 10% of your capital, you only need to gain 11.1% to break even. But if you lose 50%, you need to double your money to get back to equilibrium.

Does it look foggy? Next, DX will use its own example to explain everything above.

This is a BTC/USDT perpetual contract transaction that DX just made recently. You can see that some positions are still open. The total risk of the transaction is related to the size of your position. The total capital of the account is 50,000 US dollars, and the total position should not exceed 5%. For this single BTC/USDT perpetual contract transaction, the risk of DX is controlled at 1%. That's $500. In PA, 1% risk is usually called 1R (1% Risk).

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