hello guys today we'll talk about risk management
risk management is maybe the most important video that we're going to do
in this series
so what is risk management exactly? Risk management is knowing exactly how much
money
you can lose at any particular time because you have pre-calculated this
number
why is risk management important?
when you are trading you are your capital
your capital is your most important asset
if you don't know how to protect your capital you'll never make any money in
this business
you have to think of trading as some kind of business
and your account balance as the money you have invested in that business
you woudln't like to be unaware of
your total risk and how possible it is to lose you your investment amount you
need to keep track of these numbers
another important reason is that if you
keep good track of your risk management and you minimize the amount of
that you going to risk per trade, it'is a lot easier to
keep your psychology in where you want it to be, because
if each trade doesn't play a huge amount
in your overall performance then you will be relaxed when you're trading
because it doesn't matter, the whole
trades matter. Which brings us to the general principle of risk management
I will demonstrate this principle with an example it easier for you to
understand this way
if you want to make a specific amount of money for example you have one
thousand in your account and you want to make 500 euros
its a lot better to spread that PnL
500 euros to many trades and make
for example 100 trades of five euro
each, than spreading these five hundred euros to two trades
that's going to make 250 euros each because each of these two trades
is risking a lot of money to make this 250
euros so the more you spread your risk
to a lot of trades, the lower your overall risk
another very important concept you need to understand
which is going to help you understand why you need to spread your trades
and why you need to risk a small amount in each trade, is drawdown
what is drawdown, drawdown is the amount of money
that you lose from your balance if you have a big
losing streak so if you lose a lot of your positions
for some reason how much
percentage of your balance you're going to lose. Why is this
important there a rule in trading that
if you lose fifty percent of your account
you need a hundred percent of your account of "win"
to get back to your original amount I will give you that with an example
let's say that you have a ten thousand eur account and you have a drawdown of
fifty percent
you have a losing streak and you lose half of your account so your account is going to be
five thousand
in order for your account to go back to 10.000
10,000 you need to make 100 percent you need to make
to make twice the amount of money, so the whole point is that it's very to recover
from drawdowns you need to do a lot better
in order to get your original amount let's expand this example
by talking about your trading system. I can remind you that we already made a video
about rating systems so you can go back and check it out and see what a trading system is
if you have a trading system that
gives you some particular edge that means that you're expecting to be
winning a specific percentage of your positions
let's say that in your trading system you have calculated that you win around
seventy-five percent of your positions that means that
that doesn't mean that everything's going to go perfect
and all the time you will be losing three positions and winning seven losing three
and winning seven
it's very very natural to have a losing streak of then
positions or even 15 positions. You need to know exactly what will happen
when this time occurs
and you need to have calculated exactly
your total losses. I'm going to give you an example with numbers
let's say that you have an account that is
10,000 okay? let's say that you have
chosen to risk six-percent of your account
on each particular trade. 6 percent doesn't really sound like much
but if you lose ten positions in a row you're gonna see that your account will
be almost
Half and losing ten positions in a row in a bad day is
nothing nothing extraordinary it's very possible
let's assume now that you risk 1 percent of your account with each trade
if you lose
ten trades in a row your would barely
have lost 10 percent of your account so it's a lot easier to
accept it's a bad day, go back to sleep think about your strategy come
back
and make that extra 10 percent back
so how is risk management done what are you supposed to do exactly?
what you're supposed to do is calculate the amount
that you can lose with each individual position. You calculate that by using
a stop-loss
a hard stop loss that you calculate how much it's going to be
and you don't touch after you set it like we talked in particular
previous videos
the first step is setting up your stop loss per position and calculating the
specific amount
the second step that you must do is know
how many positions you gonna have opened at the same time
so let's say that you want to risk one percent of your account
maximum at any given time and you want to have four positions
open maximum at any given time, that simply means that
each of your positions need to risk 0.25 percent
of your account. Last issue is how much percent of your balance
should you be risking with any trade there is no general
rule of thumb that tells you that you must risk
"this" specific amount even though most traders commonly accept
2 percent, this has a lot to do with your trading frequency
which is very important. If you are trading a lot of trades per day
something like
ten trades per day or twenty trades per day, you should be risking a very
very small amount of your balance
I would say something like 0.2 percent or even lower
however if you're trading once per day then you can
maybe risk around one or two percent of your balance
if you're trading like once per month or you're a swing trader you put a lot of
thought into the trade you read the news every trade is a very
much calculated decision, it makes sense to risk something like five percent of
your balance
you should not risk more than that because
like we explained before you're not going to be able to manage your
drawdowns
you not gonna be able to manage your exposures
you gonna be in high risk of blowing your account
now let's go to cTrader. I'm gonna show you how to
place and calculate your stop loss in cTrader
in order to do your risk management. I have opened a 10,000 EUR account here
and let's assume that I wanna risk 1 percent whith each one of my trades so I
want to risk
one percent of 10,000 which is a hundred EUR
we have a
kind of a down trend here, it's not very reliable because non-farm
payrolls came out today and I'm
I'm not very fond of trading this particular news but
let's assume that we have a downtrend here and we want to enter sort
we want to place our stop loss at 1:36038 because it's
higher than the previous swing so we assume that the trend is going to
continue downwards
you may be going to go high but not higher than the previous swing
what I'm gonna do is I'm going to measure the amount of pips that I want to risk
which is 17 pips I will open an order screen
and I am going to place minus 17
at the stop loss that I want to risk. We said that we want to risk
100 euro with each position we see
we here that's it's 125 so I need to make my volume a bit smaller
it was 100k I'm made it 80k
and now I see that I'm risking exactly 100 euro
I'm going to press sell
my position is filled and I'm exactly where I want to be
I am risking 100 euro
and I'm short. Now you can, if you want you can move your
stop loss to a more technical level like exactly here you can add a bit more
on your position
and for example make it 90K
of course some people may not want to use technical levels when putting a stop
loss
maybe they want to use a specific amount when they're
to risk a specific amount with its trade. In this case it's very easy, you're going to put out an
order screen once, you're going to calculate
how many pip are you going to use with your specific volume and you're always going
to use these values.
You can even set it in QuickTrade settings so you can
you can keep your discipline. One thing that I forgot to explain that
that I want to talk about now is why are we
risking a percent of our balance instead of a specific amount
why not say that i'm gonna risk 100 euro with my
10,000 account forever the reason is that if you risk a percentage
the percentage that you risk goes up
when our account goes up so you're risking
a hundred dollars 100 euros a ten thousand euros
110 euros at 11,000 euros
and it goes on so your risk grows with your account and your reward
also depends on your risk so the more risk is your account grows
the more you're gonna make also. This goes
both ways when your account to get smaller you risk
a smaller percent with each trade because if you risk the same amount you're going to
to blow you account a lot easier
so that concludes our maybe most important video the video about risk
management
we talked about basically what risk management is
how you should think and what to do
how to calculate the amount of money that you
risk with every trade how margin works what is margin leverage and these
kind of concepts
so thanks for watching