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You’ve probably heard that 90-95% of people who trade money in the market, or “speculate” in the market, end up failing in the long run. There can be many reasons for this mass failure, but the main reason underlying all others is usually lack or lack of risk management skills. Traders often do not understand risk management and how important and powerful it is.
So in today’s lesson we’ll dive into the seemingly “boring” topic of risk management (but it’s actually a very interesting topic if you like making money). Forget about everything else, all the hype, all the trading “systems”. Because, as you read below, it explains and shows the most important parts of the trading “puzzle”…
Do not start a “war” that you are not ready to win.
Successful trading basically has three main aspects. technical ability, whether it be chart reading, price action trading, or any trading strategy (I use and teach price action strategies for a variety of reasons), “capital conservation” and how much risk per trade It covers position sizing, stop loss placement, profit targets, etc. Then there is the mental side, or trading psychology, where all three—technical, money management, and mental—are interrelated and They are intertwined and if one is missing the other two are essentially meaningless.
Today we are clearly focused on money management. Honestly, if you ask me, money management is the most important of the above three factors for him. why? It’s simple. If you don’t pay enough attention to managing your money and deal with it properly, your mindset will be completely wrong and the ability to read technical charts that you have will help you to keep your money and mind parts in place. Without it, it is essentially useless.
So, before you start trading with real hard earned money, you should ask yourself one question. Are you starting a trading “war” that you’re not really ready to win? This is what most traders do, and most traders lose. If you don’t understand the concepts in this lesson and the concepts detailed in the Advanced Trading Course, you’re not ready to win.
Don’t leave the castle defenseless!
What good is it in an entire army going to war and leaving the castle defenseless and defenseless with all its wealth (gold, silver, civilians)? Therefore, defensive measures are always taken. Even today’s armed forces always have a “National Guard” standing by, standing by in case the country attempts to attack. The truth is that humans have always guarded what was most important to them.
Protect, prolong and grow your trading account by sticking to it first and foremost. Then you execute a potential winning trade. Remember “Rule 101 of Trading”. Never protect your bank account when fighting a trading “battle”. Now, what exactly does that mean for you as a trader, and more importantly, how do you do it??
This means we do not start live trading with real money until we have a comprehensive trading plan in place. Your trading plan should include details such as how much risk you take on each trade. How much money can I possibly lose on a particular trade? What should I look for on the chart before I pull the trade trigger? Here are some of the important parts. Check out the trading plan template I provide in my course for more information.
We never get into a “trading battle” unless we believe we are likely to win (high-probability price action signals with confluence), but we always assume that we can lose (which trades but you can lose it). My defenses are in place!
Why “Being a Good Trader” Isn’t Enough…
Excessive use of leverage, also known as “ridiculous risk” or taking ridiculously large risks, is a leading cause of trading account failures and failures. This is also the reason why even the best traders can explode and lose all their money or all of their clients’ money. You may have heard of some hedge funds failing in recent years. This is due to excessive leverage and fraud. in some cases.
In his popular blog, The Naked Dollar, author Scott C. Johnston talks about how many prominent hedge fund managers have failed hundreds of millions of dollars in investment accounts simply because they didn’t properly protect their capital. I am arguing. You see, it is actually the over-confident or “cheeky” trader who convinces himself or others that he is “sure” of something and then places him in an over-leveraged position that leads to disaster. There is only one person in the
The point is…there are many “good traders” in the world and many of them are employed by big banks and investment firms like Goldman Sachs. Not all of them last long enough to produce significant returns, as they lack the mental capacity to execute capital conservation accurately and consistently over the long term. A “good trader” is not just someone who can read charts and predict the next move, but who knows how to manage risk, control risk capital and market exposure, and consistently do so in every trade. a person who does
If you’re not good at capital conservation skills, you’re going to lose trading. It’s just math, plain and simple. This is why some of the best traders (chart technicians) and market analysts end up “nobodies”. If you want to be “someone” in the market, you have to learn capital conservation and repeat it forever.
Why I’m So Excited About Risk Management
Contrary to popular opinion among the trader masses, risk management is very interesting and exciting. why? Simple. Because they make money in the market.
However, most traders just gloss over risk management as “I’ll do it later” or some other ridiculous justification. But really, it should be the first major thing they focus on. Traders often do this because they are ignorant of the power of proper money management. So let’s talk about it.
Why risk management is so powerful and how to use it:
What is the key to being consistently profitable over the long term in the market so that you can actually make a living trading? It’s simple; However, most traders blow their accounts long before this happens due to poor capital management skills.
Here’s how to make money as a trader.
- Include all losses below a certain dollar level that you pre-determine as your personal 1R risk amount you are willing to lose on a particular trade.
- Trade your edges properly and play over time so that there are big winners among the small losers.
Honestly, that sums it up. But most traders overcomplicate everything and shoot themselves in the foot over and over until they run out of money.
Now, in the image below, take a look and understand what’s going on and implement it into your trades right away.
The graph below shows that:
- Winrate isn’t that important. In the example below, the win rate is around 20% and the trader is still profitable! How? Appropriate management of risk capital. Note that some winners he is 4R or 6R, although all losses are the same amount. This is what a winning trade performance looks like, even with a mix of 2R winners.
- You have to be mentally obsessed with capital conservation. There is a 1R maximum risk amount, which he must decide how much to risk trading below the 1R maximum, but never above it. In the image below you can see that 1R max is $100 for his single trade.
- Yes, a fair percentage of the time we lost more than we won, but the management/maintenance of capital was very consistent and disciplined so the winners didn’t just take care of the losers. bottom!
Use this example as a wake-up call to those who are not practicing disciplined capital conservation. Explore the examples below to get out there and start practicing in the real world.
How do you employ money management in practice?
I have written more extensively on my thoughts and theories on money management in several articles over the years.
Risk reward is a metric that defines the risk and potential reward of trading. If risk-reward doesn’t make sense in your trades, you should give it up and wait for better trades.
There are many different philosophies of risk management, but unfortunately many of them are silly and hurt more than they help novice traders. Read the following article to learn why one of his popular risk management systems, the “2% Rule”, is not the ideal way to control risk per trade.
Placement of stop loss has a direct impact on risk management. This is because where you place your stops determines how large a position size you can trade, and position size determines how you can control your risk. For more information, please refer to the following articles:
Position sizing is the actual process of entering the number of lots or contracts you are trading on a particular trade (position size). It is the combination of the stop loss distance and the position size that determines how much to risk in a trade. Click here for details:
The whole profit target setting and profit taking process can easily become overly complicated. I wouldn’t say “easy”, but there are a few things you should know to make it easier. Click here for details:
If you don’t already know, you’ll quickly find out that closing a deal can really mess your mind. Before you can count on successfully closing a trade, you need to know everything about possible trade closings. Especially you need to know the psychology of it all. You can learn more about trade exits here:
Conclusion
Most traders spend too much time focusing on the wrong aspects of trading. Yes, trading strategy, trade entry and technical analysis are all important and you need to know what you are doing, plan your trading and understand your advantages to make money. But that’s not enough. To make money in the market, you need the right “fuel”. That “fuel” is risk management. You need to understand risk management and its importance and how to implement it in your trading. I hope this lesson gave you some insight into that.
More training, learning and experience are needed if you want to better understand how price action trading, trading psychology and money management work together to form a complete trading approach. To get started, check out my Advanced Price Action Trading Course to get off the “hamster wheel” of poor risk management skills (making the same mistakes over and over again) and learn how experts think about the markets. , learn how to trade.
Leave a comment below with your thoughts on this lesson…
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