does risk management really matter in trading?

Focusing on risk management can

be a completegame changer

The numbers do not lie

You may already understand how vital managing your risk is

Why you should focus on risk management

How you can lessen the impact of losing

streaks/draw downs

After fully understanding those…

How to calculate your position size

The simple step you can take so you

never forget about risk

RISK MANAGEMENT IS YOUR FIRST JOB

The more risk, the greater the potential

reward

Taking this principle to its extreme has been the downfall of many inexperienced traders

The primary goal of trading is to protect

the capital

Trading capital is the lifeblood of your trading business

One risk sizedoes not fit all

Trading is all about your probability of

survival

These are losing streaks, losing trades

in a row

Bad News

WINNING STREAKS/ LOSING STREAKS

COME IN A RANDOM DISTRIBUTION

WWWWWLLWWW

WWLLLLLWLL

Think about the different types of trading systems

Trending

Channel

It's natural that winners and losers should come in

clusters

Once or twice a year you will likely see one of these eight to nine trade losing streaks

CAN YOU RECOVER FROM A STRING OF LOSING TRADES?

Initial: $10,000 After Loss: $9,500Need: 5.3% over that $9,500 to get back to $10,000

Account draws down 10%?

You need to make 11% on remaining balance

25%?You need to make

33%

50%?You need to double

the size of your remaining account

Consider a scenario where on every trade you are risking 5%

during the 1% probability losing streak!

If your account has gone down 40%, you need to make 67%on the remaining

balance!

What if you used a lower risk %?

Your account is eminently survivable

WHAT IS EFFECTIVE RISK MANAGEMENT?

1. RISK PER TRADE

2. DAILY OR WEEKLY CIRCUIT BREAKER

You will find that there are days and weeks

when the markets are simply not cooperating

Go back to that probabilities table

You need to look at this in terms of recover-ability

Set the circuit breaker large enough so that it can accommodate the normal fluctuations

If you're down 10% of your account in one day, you know that

you can recover relatively easy

3. MAXIMUM DRAW DOWN YOU ARE

WILLING TO TAKE

You need to have in mind a maximum

draw down level for your total account

You have to redo your homework

You must redo your analysis

It's time to take a fresh look at your trading system &

consider changes to it

Consider changes to the instruments you

are trading

Consider changes to the time frames you

are trading

This will in all likelihood be a relatively large

number

How much?How large?

How much of a loss will I accept before reassessing

my trading business?

Determine your average risk per trade

Let's assume in our example that the

average losing trade for your system is $200 per trade.

account sizex

risk %/

average lossx

price per tick

We talked earlier about 2% - 5% risk

With a 1% risk, you can survive many

storms

The flip side of the 1% risk is that you will not

be able to make as much money on each

trade

You always have that balance between how

much risk you are willing to assume versus how

aggressively you want to pursue gains

Failure to respect risk will kill you

Resist the temptation and focus on risk

management

4 STEPS TO BEING A RISK MANAGER

Before you trade, decide how much

you're going to risk

Determine your circuit breaker level

Determine your draw down size

Write it all down!

VITAL