Risk Management Guide
Learn under what conditions, at what time, I reduce or increase risk. NOT related to confidence rating of setups. Founder only.
What Is Risk Management?
So, before diving into the content I had planned for this blog, specifically tailored to Founders and how they can fully leverage how I manage risk based on the data I have shared in my trading, allow me to open the topic up for everyone and expand a bit on the topic itself.
So, what is Risk Management? It is the single sole most important thing in trading. It is, mathematically, possible to completely and blindly trade the markets, and provided you just add a bit of risk reward, a bit of math on stoploss placement, risk management will do 90% of the job.
It is the cautionary & protectionistic understanding that you ALWAYS can be wrong, and therefore MUST place a stoploss that reflects past performance, completely rooted in data.
It is the optimistic & humble winners’ guide to manage profits, not trying to greed themselves into positions that go to infinity and back. The winner understands that profits are rooted in math and data as well, and takeprofits must reflect that.
It is the adaptive & flexible losers emergency exit plan, when data and conditions change and you must make adjustments to prepare for and prevent further damage, making sure you constantly evolve your trading based on when conditions can, or have, already changed.
And I have not even started on the emotional aspect of a traders mindset relying heavily on proper risk management, as well, but truly, in it’s naked and raw form of executability, “emotions” should not really matter, anyway. This is not a topic I will expand upon here and it is NOT to say that I am not considering mindset and emotion for a trader, but for another time.
In short, risk management is 90% of the reason for profitability. Technique is 10%. Risk management encapsulates more than just the decided risk for a particular trade or investment execution. It is the very foundation to establishing profitability. If you do not understand EXACTLY the risk, based on a variety of mathemathical formulas, be it advanced such as Kelly & Optimal F, to just more standardized 0.25, 0.5, 1% risk per decision approaches, you can be the best and most knowledgeable trader in the world, but absent risk management, you are screwed. Contrarily, if you are a medicore trader with EXCELLENT risk management, you can be amongst the top.
How Risk Management Works On This Blog
So, when I share trades and investments publicly with everyone, you all know if you have read introduction guide that I base the confidence in my analysis and trading on arrows. The color of the arrow will reflect my subjective opinion on what I deem as the “edge” of the trade.
a 70% edge, like a green arrow for a long trade or a red arrow for a short trade, does NOT mean I expect 70% of the time that the trade will win. It means I expect a payout of 70 $, for every 100$ I risk, and only $30 loss. That’s the edge.
A trade can have 10% winrate, but pay out many R’s, (risk reward return ratios) - and as such, the edge can be extremely high, at a low winrate.
However, many times, even under conditions where I am extremely risk reduced, I will still occasionally share 6/6 confidence trades. This will then turn intoa win or a loss, and be added to the data. You can then interpret my data equally as I can. When I interpret that data, I make critical adjustments to my risk.
The first topic on risk manage I like to cover, is the “speed of RR” return, when trading and investing. So for example, I use the 0.25% and 0.5% risk per trade models on the blog when sharing short term and long term trades. However, for investment grade trades, which are far more rare in frequency and typically yields more than 2 RR per trade (never below 1 RR.) - For these, I always risk more than 1%. Sometimes as high as 4 or 5%. I do not typically announce this, your appetite of risk is up to you in that regard. Conclusively, investment grade setups are always significantly higher than short term and long term grade setups.
I am now going to share the rules for adjusting risk for the Founders of this blog, so they will be following exactly the automatic, mathemathically derived risk management techniques I use, regardless of what subjective, disceretionary confidence I may asign a particular trade or investment decision.
Here goes: