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Risk-management

Posted: 2018-Aug-30 17:55 by OScar

If I only learned one thing so far, it would be that (good) risk-management is pivotal to success in trading.

So I was wondering what kind of approach everyone uses in regard to risk-management.

How do you select trade ideas that minimize your risk? How do you implant these trades and how do you manage them afterwards?

Also, do you use any safe-guards to protect your emotional capital in order to minimize the risk that you let your emotions influence your trading?

Anything that has to do with how you handle your risk, I would really appreciate to hear about.

I don't need specific methods (although those would be fine too), as I imagine the way you deal with risks is quite dependent on your strategy, but I'm more looking for the general approach you assume towards risk-control.

Up to now, the risk-management rules I know and am planning to use are:

- Always have a pre-defined stop-loss
- Stick to 1-2% risk on any position (0.2%-0.5%, if you are just starting out)
- Look for favorable return/reward trades
- Use a trailing-stop, or take partial profits.
- Practice patience
- Only trade when you are in a good mood
- Keep a journal so you can analyse where you go wrong and act upon it to minimize risk in the future

I hope this thread will provide me with new insights and ideas so I can extend and maybe alter that list further.

Posted: 2018-Aug-30 18:31 by Mikan

I am not an expert but in my opinion many traders device a system and then become soft and flexible about SL, it takes a lot, i mean a huge discipline to stick to your plan NO MATTER WHAT. Trailing stops are a good way to lock in profits and taking profits too soon is a mistake.

Posted: 2018-Aug-30 19:21 by cardigan

I can't really give you much advice on this as I'm still messing around with it myself, but one thing that I have determined is that for me, it doesn't make sense to take partial profits, especially as a risk management measure. Now I guess it depends on how close to your actual "TP" (if you have one) you take partial profit. But I used to take half the position off when the market went 1:1 in my favour - 1:1 in number of pips. That would give me a risk-free trade while allowing my stoploss to remain in an appropriate location, i.e. rather than moving to BE since there's nothing special about that price. But there are problems with this approach.

If you take half off at 1:1 in pip numbers, then actually your profit is only half of what you risked, since you risked a full position over N pips but only took half a position size in profit over the same number of pips. So you'd need to allow your trade to move twice as far as your SL in order to be able to take half off at an actual 1:1 RR. That may or may not be feasible depending on your trading style.

But the worst part is that you're cutting your profits. If put on a good trade with a good RR ratio but take half off really quickly to cut your risk while you're in profit, and the rest then goes and hits your TP, the amount you lose in "lost potential profit" will usually be significantly more than the amount you potentially saved if your SL would have been hit.

I suppose it depends on your trading style and typical RR, but at least for me, when I thought about the few pips I was saving by cutting a position in half vs the multiple of those pips I lost in potential profit, it just didn't seem to make sense to cut. Either all in or all out for me.

Also moving to BE, I'm starting to like this less and less. Yes you do cut your risk, but what's so special about the price you entered? If the market trades up there again does it mean anything? If your original SL was in a location that made sense, and you're actually happy with the risk, why then move the SL to some random point on the chart (entry point)? It makes more sense if the market has moved some way in your direction so that if it comes all the way back then it's not behaving as it *should* if your premise is correct, so you want out - but in that case there might be better in-profit places where your trade could be invalidated; your entry point is unlikely to offer the best of anything.

Posted: 2018-Nov-05 15:27 by OScar

I remember a while back the topic of partial profits also came up in the chat, and it was argued that, if you believe your premise is right and it goes in your favor, then why reduce your position?

The point about it lowering your RR is another good point that speaks against it.

However, I do believe there is some merit to it, first of all, you lower your overall risk by diversification. Say you are right about 70% of the time, and 30% of the time that you are wrong, the market has 50% chance to either move up or down a certain amount of ticks, you can reduce the losses you take overall on this 30% by taking partial profits. Of course it will mean you miss more in potential profits, but I'd imagine it does reduce your volatility.

It might also reduce the emotional impact a loss has on you, because you already took partial profits.

However, speaking in terms of pure return it's probably a bad mechanic.

Love your point about setting your Stop-loss to BE. I read/heard it quite a few times, especially when I first started reading and it did make some sense to me, but you are absolutely right in that it's mostly an arbitrarily chosen point in regards to where you should place your S/L.

Posted: 2018-Nov-06 14:40 by Codex

I think an important part of risk management is to always look for new ideas and strategies to expand opportunity.

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