Trading without risks is impossible. It is important to understand that there is NO trader who always wins, neither among newbies, nor among professionals. It stays the same even if you use trading bots. Then, what is the difference between a winner and a loser? Any holy grail? Yes, there is one.
This holy grail is risk management. Many of us while talking about trading think of profits (strategies, indicators, setups and so on), but not of losses. Exactly this is a disruptive mistake. Although сalculating, planning and controlling losses may be considered as boring “unsexy” aspects of trading, they make up the lion’s share of your profitability! We will explain it in plain language and review the general setups for risk management that will help you stay in-game even in the case of 100 losses in a row!
Trading with risk management VS trading without risk management
Let us imagine a trader A and a trader B implement the same strategy for 8 days on the same asset with equal deposits ($1000). Each day the trading setup brings profits or losses that are presented in risks. 1 risk (R) is equal to $200. The only difference is that trader A applies risk management (we are not talking about a single stop loss!), while trader B doesn’t care about it. As a result, trader A wins 40% and goes to the party, whereas trader B loses all the deposit and goes to the bank to defer the bill payments. Why? Below you can see the simple illustrations of what happened.
Trader B suffered losses for 4 days. On the 5th day, he failed again and wasn’t able to continue trading. At the same time, he saw that the trading strategy would have brought him the profits on the 6th day already if only he was still in-game. Unfortunately, he wasn’t.
As for trader A, he also suffered losses. However, he set the risk management rule beforehand that says to stop trading for 2 days in case of a 60% drawdown. Thus, trader A accepted the losses and chilled for a couple of days, as the rule stated. He returned to trading on Day 6, managed to recover losses and finally earned 240%. By the way, during these days he had some time to improve the strategy that he will apply the next 8 days.
See any difference? This is how a single risk management rule saved and multiplied the deposit (now imagine you have a set of risk management rules).
Note that the examples are simplified and consider one risk setup only, thus, the cases vary and there is no “one size fits all” risk management strategy. However, these are the general illustrations of how risk management works.
This way, you cut your losses and let your profit flow, allowing yourself to stay in-game even during hard times. Remember:
“Markets can stay irrational longer than you can stay solvent”
(John Keynes)
Wanna win & go to the party too? Then master risk management, automate it with Bitinsure and develop a winner’s mindset! Cheers! In our next article, we’ll discuss the way 5% of traders reach trading goals and become millionaires. Stay tuned!
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