There are two quite important indicators: position size and expected value.
1. position size means the maximum amount to place an order
This depends on the highest level of risk tolerance, which is how much % you can lose per trade. For example, if you take 100 million to trade and bear a maximum loss of 2%, your risk is 2 million.
Then divide this amount by the stop loss percentage to get the position size. For example, stop is 10%, then position size will be 2 million/10% = 20 million.
So if you are unlucky, if you place an order of 20 million, stop loss of 10%, you will lose exactly 2 million, which is the acceptable risk level for that trade.
If stop loss is 20% then position size will be 2 million/20% = 10 million. Unfortunately, I hit a 20% stop loss and lost exactly 2 million, exactly as planned.
2. Expected value:
Expectation = (probability of winning x level of winning) - (probability of losing x level of losing).
For example, the probability of winning is 40%, the average win is 20%, the average loss is 10% (with stop loss), the position size is 20 million, then the expected effect will be:
(40% x 4tr) - (60% x 2tr) = 0.4tr (2%) hay (40% x 20%) - (60% x 10%) = 2%
Note that this is 2% on position size 20 million, with 2% risk and 10% stop loss of total capital of 100 million.
That is an optimistic assumption, what method do you traders often use and if there is a better way, please share in the comments!
#BTC #Crypto
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A few words about Associate Professor, Doctor. Vo Dinh Tri
Associate Professor, Doctor. Vo Dinh Tri is currently an Associate Professor of Finance at IPAG Business School Paris in France and a lecturer at Ho Chi Minh City University of Economics. At the same time, he is also an advisor to many Blockchain projects and businesses in Vietnam.
He focuses on research on the digital financial market and has published in many international financial journals such as Journal of Business Research, Annals of Operations Research, International Review of Financial Analysis, The Journal of Risk Finance, Economic Modeling, and Finance Research Letters.
He also regularly writes and contributes analytical articles to economic newspapers in Vietnam such as Saigon Economic Times, Saigon Finance, Vietnam Economic Times, and Nhan Dan Newspaper. You can also find many of his articles on VnExpress, Tuoi Tre, and Vietnamnet.
