Risk Management is a critical part of the trading plan. It enables us to minimize losses and maximize profits. This is where we must be disciplined and follow the rules. Big losses are the main destroyer of your account, and we can keep the risk on a trade to what is expected by setting a hard stop loss.
Problems Traders Face:
- Being afraid of your stop loss being hit and closing trades early is not correct. Getting stopped out at your predetermined stop loss is correct.
- If you hate being wrong and move or remove your stop-loss is not correct. Getting stopped out is correct and part of trading.
- Taking too much risk that you can’t afford to lose is not correct. Following your money management plan is correct as it should take into account how much capital you have.
Risk: Represented as R
Each trade will represent 1 Risk or 1R. We find that taking profit on position 1 at 1R works well. This means to set your profit target the same distance as the height of the Asian session channel and is the minimum we want to take profits. Remember that the smaller the profit target, the easier it will be to reach. Many trades will hit 1R and then reverse back to breakeven (BE).
Further testing could be done with targets on trades in different market conditions. For example, having larger targets in trades with the trend.
Drawdown: The amount your capital drops before reaching a new high watermark in your Equity Curve.
Position sizing will be determined by your capital and the money management strategy you choose to follow. It is the final piece of the plan and one that will determine how quickly or slowly your capital grows or shrinks.
Trader’s Mindset: Acceptance of Risk
You must learn to accept the risk if you want to be a successful trader. Easy, I accept it! Well, it’s not that easy and is the root cause of fear and pain in trading. It is one thing to say, and a completely different thing to live it. The reason trading is so difficult for most is that you have to do what is uncomfortable. Namely, have confidence in yourself and your edge while facing uncertainty in the market day in and day out. The only way to develop those skills is through hard work. Are you ready to put in the work and commitment to change?