Understanding Risk Management in Trading :

Today, let's dive into the essentials of risk management in trading. When you enter a trade, you're risking capital based on a strategy or an idea. However, there comes a point when that idea may no longer be valid, or at least the probability of success decreases to the point where the risk isn't justified. This concept is known as invalidation.

If your trading idea doesn't have a clear invalidation point, it's worth rethinking. And if your idea lacks any basis, there's no real idea at all time to go back to the drawing board.

Now, let's explore the different types of invalidation you can use to manage your risk effectively.

1. Price-Based Stop LossIn this approach, you determine that a certain level (X) is a support zone. Invalidation occurs if this level fails to act as support.

To implement price-based invalidation, simply draw a support level and place your stop loss just below it. There’s no waiting for a candle to close—you exit the trade as soon as the price drops below your support line. (Example shown in the first attached image).

2. Time-Based or Candle Close InvalidationThis method assumes that the price should consecutively close above a specific level (X) to confirm a breakout. Invalidation happens if the price closes below this level. You hold the trade as long as the price stays above your support level, disregarding temporary wicks.

This is a more manual approach to stop losses, where you close the trade if the candle closes below your support. The timeframe you use depends on the one you’re following for the trade or where you want price action to hold on a closing basis. (Second attached image shows an example).

Both of these strategies provide clear points where a trade becomes too risky to hold, helping you manage potential losses and protect your capital.

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