What’s goin on guys, it’s PJ here and today I’m going to try and explain the basis of how I utilize risk management in my trading! Before we start the video, we’d greatly appreciate it if you guys could take a second to click that like/subscribe button down below along with the bell notification so you’d never miss out on when we’d post new videos. Since we’re still trying to figure out this whole youtube thing, we would love to hear what you guys wanna see more from us, so leave down a comment below and let’s get started.
** **
What is risk management?
As a trader, risk management is basically a combination of both money & emotional management while being in a trade position. Specifically for this video, these tactics will involve adjusting position sizes & using stop losses. In the beginning, it’s very tempting to just go all in every trade, but after a while, you’ll realize that your account balance will turn into $0.
** **
Why use it?
I’ve always been a visual learner, so I’d like to use an example for this. Risk management allow traders to benefit off asymmetric risk/reward ratio, and keep their losses to a fixed percentage of their portfolios. Let’s use a coin flip as an example.
SYMMETRIC RISK/REWARD: 1:1
If I flip a coin 10 times, and I was rewarded $1 every time it landed heads, and lost $1 every time it landed tails, then I would have to flip heads 6/10 times in order to have a positive ROI (+$6/-$4)
** **
ASSYMMETRIC RISK/REWARD 2:1
If I flip a coin 10 times, but I was rewarded $2 every time it landed heads, and lost $1 every time it landed tails, then I would only have to flip heads 4/10 times in order to have a positive ROI because this would get me +$8/-$6
** **
In order to have an asymmetric ratio, your distance to target must be greater than distance to your stop loss. Your target will depend on your own analysis, but typically will be identified upon key s/r levels/first trouble areas, and your stop loss will ALWAYS be at a point of invalidation, which just means it is where you are WRONG on the trade idea. I get a lot of people asking me ‘how many % away do you put your stop?’ and there’s no right/wrong answer to that because where you ENTERED in the trade makes all the difference.
** **
POSITION SIZE
This is the main part that I’d want you guys to conceptualize and I’ll try and simplify it as much as I can. Position sizes are calculated by knowing how much % you want to risk of your portfolio, typically you’d want to risk in between 1-5% depending your risk tolerance, and your distance to stop loss. The wider the stop, the smaller the position size, and the tighter, the stop the larger the position size. But no matter where you get stopped (wide or tight stop), you will lose the same % of your account that you chose previously. That’s the beauty of risk management, you can have different position sizes depending on your entry/stop loss and you will always know how much you will lose on the trade if it goes wrong.
** **
RISK MANAGEMENT CALCULATOR:
One of the things I did to better visualize this concept was to actually use a risk management calculator and plugged in numbers a few times to understand how the whole procedure was calculated. I use this calculator for bitcoin/ethereum position sizes for perpetual swaps:
** **