Tuesday, February 18, 2014

3 Keys to Proper Trade Management

Today we take a look deeper into the world of proper trade management. This is a VERY important
aspect that EVERY trader needs to consider, from new traders to old. Unfortunately several traders don’t pay attention to this part until AFTER they have blown an account or more out.


1. Risk-Tolerance

The first thing you need to do is take your account size and multiply it by 3%. This will tell you what your goal for risk on each trade should be.

Note: Smaller trade accounts, such as $2,000 trade accounts will often need to use up to 5% risk per trade, which is one of the reasons why smaller accounts struggle sometimes to make profit...they have to risk to much on each trade and only a few losses can blow the account.

Note: The less risk, the better. If you can risk only 2% of the account you are much better off.

Think of the numbers behind this. If I am risking 3% of my account, and I have a positive expectancy of 70% on my trades... I know that 30 out of 100 trades will be losses, and if I am only risking 3% of my account I will be able to absorb those losses on the way to having 70 of those trades as winners.

example: a $5,000 trade account would risk $150 (3%) on each trade, which means 15-ticks of risk on Crude, Gold, or Russell.


2. Risk/Reward

Once you know your risk-tolerance to your specific account size, now you need to make sure each trade you take has the proper risk/reward ratio.

Very simple. I want to risk less than my expected reward.  

We strive for a risk/reward ratio that is great than 1:3, meaning that we will risk $100 to earn $300, or 10 ticks to make at least 30-ticks.

Assuming we have a 70% Positive Expectancy on our trades, we will take 30 losses and 70 winners for every 100 trades we take. I want to make sure that the losses we take are small, and the winners are large. This example would result in make profit above the amount of the losses.

Example: Risk $100, Earn $300
30 Losses @ $100 each = - $3000  
70 Winners @ $300 each = + $21,000
Net Profit on the account = + $18,000


3. Position Size

Now that we know how much we want to risk per trade (based on account size) and we know that we are risking 1/3 of our reward on each trade...now we need to adapt to each entry pattern we get for each trade.

Although we use the same 'entry patterns' to take each trade, usually each pattern is slightly different, so one-size does NOT fit-all when it comes to your stop loss on each pattern.

Because your stop-loss will be slightly different on each trade, each trade will have different amounts of risk, so we need to adjust our position size.

Remember, we only want to risk 3% of the account, let's use a $5,000 account as an example, with a max risk of $150 per trade.

Examples for Position Size:  Crude Oil / Gold / Russell = $10/tick

Entry Pattern #1
Requires a 5-tick stop loss
5-tick stop-loss = $50 risk per contract
I can risk $150 per trade
I can trade 3-contracts (3 x $50 = $150)

Entry Pattern #2
Requires a 7-tick stop loss
7-tick stop-loss = $70 risk per contract
I can risk $150 per trade
I can trade 2-contracts (2 x $70 = $140)

Entry Pattern #3
Requires a 10-tick stop loss
10-tick stop-loss = $100 risk per contract
I can risk $150 per trade
I can trade 1-contract (1 x $100 = $100) 
(2 x $100 = $200 = 2-contracts has too much risk)



As a member of SOT you will be trained on proper risk-management, trade-management, position size, as well as trader psychology to avoid the common pitfalls that happen to most new traders.

Managing Risk is the most important aspect of your trading career...not fancy indicators, bells and whistles. Protect your capital, stay alive while you master this skill, and prosper!

Join our Free Trial, and register for our Nightly Newsletter at SchoolOfTrade.com

Want to see us trade LIVE? Click here to register for theFree Trial!
Automated Trading Strategy; Let theComputer do the trading
Are you a Crude Oil Trader? Click here totrade Crude Oil
Are you a Euro Trader? Click here totrade Euro
Are you an E-Mini Russell Trader? Click here to tradeE-Mini Russell
Are you a Gold Trader? Click here to tradeGold
Join the Premier Live trade-room as an Advanced Member

No comments:

Post a Comment

Thank you for your comment! Your comment will be reviewed and posted asap, thank you for your patience.