Developing a risk management plan | The Diary of a Trader


Hello again. And this video I will be talking to you about
designing a risk management system. Risk management is the most important thing
when it comes to trading. A lot of people don’t realize this going in
and that makes a lot of sense because you’re wanting to know when to get and when to get
out that type of thing. The reality is that sooner or later given
enough luck you will make profitable trades. Markets are either going to go up or down
too. In theory you have a 50 percent chance of
being right or wrong at one point or another. So with that being the case risk management
is where everything really gets decided. As to your long term profitability there are
a couple of different ways to look at it and there’s the mathematical way and there’s a
billion articles and videos and books about that out there. Typically traders will risk 1 percent maybe
2 percent of their account at the most and they’ll place a trade so that if you lose
a trade and you lose 1 percent of the count you’re not doing a lot of damage yourself. You can have multiple losses in a row and
that’s fine. But the real way to decide what your risk
management system is. Will be what you can actually use. In other words what I mean is what you’re
comfortable with. Some traders will find that they are perfectly
comfortable trading 1 percent risk you know risking 1 percent of their total account on
a particular trade. Other traders will find that they can do 3
percent or even 10 percent. Now the odds of somebody risking 10 percent
every time they trade and coming out ahead in the 4 x world are very slim. The reality is that you should not be leveraging
up that kind of aggressiveness. Now having said that if you’re comfortable
doing it then you at least have the ability to work with whatever trading system of your
Hound’s. One of the easiest ways to figure this out
is to place trades at perhaps a half a percent increments. So what I mean is the first trade you risk
half a percentage of your account. Notice how you’re feeling. Notice if you’re messing with the trade if
you’re jumping in and jumping out of your fidgeting and if that’s not an issue then
you go up to 1 percent. And notice how you trade again. Is it something that you can place to trade
and walk away from the computer perfectly comfortable with your stop losses and everything
else and then so on and so on. What you’ll find is there will be a point
where. Your nerves will take over. And that is clearly too much leverage at too
much risk lot of risk management books don’t go into that. They go into the mathematics. Now mathematically speaking most large firms
only risk minuscule amounts maybe like two point two percent on a trade. I realize you’re a retail trader you’re trying
to make a few more bucks than that. So it makes sense that you would risk 1 or
2 percent. And it’s really going to come down to your
personality. So with that being said the first thing you
need to do is realize what you’re comfortable with and what you can what you can handle. That is the biggest hurdle. Once you get past that and you have a set
percentage then it’s pretty simple you just take you know say 1 percent of your account
and risk that and where you need to place the Stop-Loss you figure out how much per
Pipp you should be trading and leave it at that. Some people don’t use percentage and they
use a specific amount of pips. They’ll say something like 100 pips on the
Stop-Loss. And the problem with that is the market doesn’t
care that it’s 100 Pep’s below what you really want to look for support and resistance places
that they’ve made a trade a massive turn around or whatever where the market does care. So I’m not a big fan of fixed numbers percentages
are one thing because you can tailor those to the position size but an actual fixed number
is a completely different story. So really at this point in time it’s the psychology
that I would press upon more because there is no right answer with a risk management
system. It’s just what’s comfortable for you. And at that point in time which you can use
consistently and without concern.

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