THE ONLY RISK MANAGEMENT GUIDE YOU WILL NEED🐳
THIS HAS SAVED ME HUNDREDS OF THOUSANDS OVER MY YEARS OF TRADING, NOW I GIVE IT YOU
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1.🤔
Determine how much you can afford to lose at any given time
(Any given time = Collective sum of all losses of all active positions at any time)
Calculation to determine max loss over one position - to calculate this over multiple positions simply do this calculation for each position and add up the desired loss to match your max desired loss across all active positions
(simple leverage rules)
$1000 @ 100x lev = $100,000
$10,000 @ 10x lev = $100,000
$100,000 @ 1x lev = $100,000
Calculation to determine investment depending on lev and predetermined max loss
Know factors
- Max loss decided before trade $2000 (example)
- Trade draw down risk 3.5%
- Leverage 10x
Unknown (this is what we are calculating for)
- Capital investment to not exceed max loss with the above components
= (100 x 2000)/35%
= 200,000/35
= $5,714.28usd margin
with
position size = margin * lev
= $5,714.28 * 10
2.😎
Then ensure this risk allowance is not exceeded at any given time, whether that be one trade or 10 active trades, this risk tolerance should not be exceeded
(this may mean you can not enter a new position until you free up risk allowance)
To calculate whether you have exceeded your risk tolerance simply follow this
If the max desired loss (your predetermined max risk across all active positions) is < actual risk, your risk tolerance is exceeded and you are over-exposed
Actual risk = collective sum of all possible losses ($) of all active positions
3.🤑
Free up risk allowance by taking profit on active positions, moving stop losses on current trades ( this reduces risk exposure and frees up risk allowance from new trades) or closing trades entirely
example
if you determine your risk allowance to be 10k and you take one trade with a 9k risk you then can only open any amount of more trades with a max of 1k collective risk until risk exposure is reduced by the above means
Every time a profit is taken, a stop loss is moved or a trade is closed, this results in risk allowance > actual risk, thus you can assign more risk to the market by adding to positions or taking new trades
4.💎
Why risk management is important
This ensures at any given time in the market you can not exceed your maximum desired loss, this helps prevent drawdowns and prevents trading, it also ensures you can not expose yourself to any one particular move, day, week or month depending on time horizon of trades
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