Risk Management and How to Handle Losing Trades
Summary
TLDRThe speaker provides an in-depth explanation of risk management strategies for trading, breaking it into two parts: evaluation and funded accounts. The focus is on managing drawdowns and risk per trade, starting with 1% risk and adjusting based on performance. The strategy emphasizes understanding your trading model, scaling risk up or down depending on win/loss streaks, and refining the approach through journaling and backtesting. The goal is to maximize profits while minimizing losses, particularly when transitioning from evaluations to funded accounts.
Takeaways
- 📉 The speaker focuses on risk management and breaks it down into two sections: evaluation risk management and funded account risk management.
- 💰 For evaluation accounts, the total drawdown is taken into consideration. If the drawdown is $10,000, the speaker aims to spread that over 10 losing trades, making each trade risk $1,000.
- ⚖️ The speaker uses a linear risk scale. If a trade is lost, the risk is reduced to 0.5%. If a trade is won, the risk is increased to 2%.
- 📊 It's important to backtest one's strategy to understand the appropriate risk levels and improve trade confidence.
- ⛔ If on a losing streak, the speaker suggests lowering the risk to 0.25%, but also notes that if the account is near depletion, it might make sense to return to 1% for a potential recovery trade.
- 📈 For funded accounts, the speaker starts with a lower risk, often around 0.5%, and scales up to 1-2% as the account grows.
- 🔄 Once a funded account has a healthy margin, the speaker abandons percentages and focuses on trading specific contracts with a maximum risk of 100 ticks.
- 📝 Journaling and reviewing trades are essential steps, especially after a losing streak, to refine strategies and models.
- 🎯 Confidence in the trading model is key, and the speaker emphasizes the importance of understanding the model's win/loss ratio and performance in backtesting.
- 💡 There are two main approaches to evaluations: a conservative approach where risk is adjusted incrementally, and a more aggressive approach for traders who can afford multiple evaluations.
Q & A
What is the primary focus of the speaker in the video transcript?
-The primary focus of the speaker is explaining risk management strategies for trading, specifically covering evaluations, funded accounts, and handling losses.
How does the speaker approach risk management during evaluations?
-The speaker starts by calculating the total drawdown, which in the example is $10,000. They divide this into 10 trades, risking $1,000 per trade, and use a sliding risk scale, starting with 1% of the account. If a trade is lost, the risk percentage is reduced to 0.5%, and if a trade is won, the risk percentage increases to 2%.
What is the purpose of scaling risk in the evaluation process?
-Scaling risk helps manage losses and maximize potential gains. Reducing risk after a loss limits further damage to the account, while increasing risk after a win helps capitalize on positive momentum.
How does the speaker adjust risk management for funded accounts?
-For funded accounts, the speaker starts by risking 0.5% per trade and gradually increases to 1-2% depending on performance. They downsize at the beginning but stop scaling risk downward once reaching their floor of 0.5%.
What is the significance of limiting the number of losing trades in both evaluation and funded accounts?
-The speaker aims to limit losses by managing risk so that a losing streak of 10-15 trades does not exhaust the account. This helps maintain a buffer and prevent account blowouts, ensuring more opportunities to recover.
Why does the speaker advise traders to backtest their models before live trading?
-Backtesting provides confidence in the trading model by proving its effectiveness in historical data. This ensures that traders know their model’s strengths and weaknesses, reducing emotional decision-making in live trading.
What does the speaker recommend doing after experiencing a series of losing trades?
-The speaker suggests journaling trades, reviewing what went wrong, and analyzing whether the trades respected certain market conditions or timeframes. This review helps refine the model and improve future performance.
What does the speaker mean by a 'Hail Mary' trade, and when does it apply?
-A 'Hail Mary' trade refers to increasing the risk back to 1% after a significant losing streak, particularly when the account is close to being lost. It’s a high-risk move to try to recover the account before it's depleted.
Why is it important to get out of evaluation quickly according to the speaker?
-The speaker emphasizes that evaluations are not meant to be long-term processes. The goal is to pass the evaluation quickly and move to funded accounts where real profits can be made. Prolonging evaluations incurs monthly fees, especially in futures markets.
How does the speaker recommend handling losing streaks in a funded account?
-In a funded account, the speaker advises keeping risk levels consistent and sticking to a maximum loss per trade. The idea is to trade cautiously and manage the account well enough to sustain profitability without taking unnecessary risks.
Outlines
🔍 Introduction to Risk Management and Evaluation Strategies
The speaker introduces the topic of risk management, breaking it down into two key areas: evaluation risk management and funded account risk management. The focus is initially on evaluation strategies, explaining how traders can manage risk effectively by setting limits on total drawdowns, determining the number of trades to fit within those drawdowns, and calculating risk per trade. The speaker uses a scenario where a trader has a total drawdown of $10,000 and wants to divide that into 10 trades, risking $1,000 per trade. The importance of adjusting trade size and risk based on account performance is emphasized, as well as the concept of linear scaling: starting at 1% risk per trade and adjusting based on wins or losses. The speaker highlights the need for personal adaptation and suggests experimenting with different risk levels depending on experience and circumstances.
📈 Managing Risk in Funded Accounts
This section transitions to managing risk in funded accounts, where the speaker discusses how their strategy changes slightly compared to evaluation accounts. The main difference is a more conservative approach at the start, with risk levels starting at 0.5% instead of 1%. As the account grows, the speaker scales up to 1-2% risk per trade. They emphasize the goal of achieving a healthy margin in funded accounts before shifting focus from percentages to trading contracts directly. Once a substantial margin is reached (e.g., $30K in the account), the speaker trades strictly by the number of contracts, using a predefined maximum risk and potential reward. They adjust their stop-loss and take-profit points to manage risk more precisely, aiming for smaller, consistent gains rather than large, risky trades.
💡 Understanding and Handling Losses
The speaker provides advice on handling losing trades and how to maintain confidence in one's trading model. They stress that losing trades are a normal part of the process and that the key is to understand the model, back-test it, and gain confidence in its overall effectiveness. Traders should focus on managing their risk rather than worrying about each individual trade. The speaker also advises journaling and reviewing each trade, especially during losing streaks, to identify patterns and refine the trading strategy. This approach helps build a deeper understanding of the model and ensures that traders can adjust their strategies based on concrete data and experience rather than emotional reactions.
Mindmap
Keywords
💡Risk management
💡Drawdown
💡Evaluation
💡Funded accounts
💡Stop loss
💡Linear scale
💡Backtesting
💡Scaling
💡Hail Mary trade
💡Consecutive losses
Highlights
Introduction to risk management, dividing it into evaluation and funded risk management sections.
Explanation of evaluation risk management by setting a total drawdown (e.g., $10,000) and dividing it into smaller trade sizes.
Start by risking 1% of the total drawdown, aiming to get 10 losing trades out of the total drawdown.
Risk-per-trade strategy: for $10,000 drawdown, each trade is a $1,000 loss depending on the stop loss size.
Adjusting risk dynamically: increase risk percentage after winning trades, decrease after losing trades.
Recommendation to backtest risk strategies to understand them thoroughly.
Scaling risk percentages: starting at 1%, moving to 2% after wins, reducing to 0.5% or lower after losses.
Evaluation risk management includes adjusting risk based on streaks and personal financial circumstances.
Handling funded accounts: start with smaller risk (0.5%) and gradually increase after successful trades.
Trading without fixed percentages after reaching a healthy margin in funded accounts, focusing on contracts instead.
Emphasizing the importance of risk management for long-term trading success.
The necessity of handling losing trades, refining models through backtesting, and gaining confidence in strategies.
Traders should journal their trades and analyze what could have been done differently after each loss.
Two routes for risk management: one for those who can afford multiple evaluations (high risk), and one for those who cannot (low risk).
Final advice: risk management is key, backtest thoroughly, and make adjustments based on confidence in your model and personal circumstances.
Transcripts
well good morning troops I hope everyone
is having a lovely day it's bank holiday
Wednesday markets aren't really doing
anything um so one of the most requested
topics for me to go over is risk
management so I'm going to break it down
into two steps so an evaluation risk
management and then there's two steps in
that and then there's a funded uh risk
management section so let's start let's
start on evaluations right so typically
the way that I go into
evaluations um from a risk management
perspective is I take my total draw down
yeah let's just do that so my total draw
down let's just assume that it's 10K for
simplistic reasons right your total draw
down is 10K and basically what I want to
do is I want to get out roughly 10 to 15
trades out of that right typically I go
for 10 um on on evaluation so I want to
be able to get 10 losing trades out of
this total draw down um so basically
what you do is you just divide that by
100 and times it by 10 right so you just
divide it basically divide it by 10 so
$1,000 a trade $10,000 draw down um so
basically every trade that I will look
to take as a starting trade will be a
$1,000 loss right so say I'm risking 100
ticks it'll be two contracts because
that's $1,000 it's $10 a contract um if
I'm if my if my stop loss is 200 ticks
it will be one contract if it's above
that it'll go down to micros typically
I'm never really taking trades above
$100 stop loss 100 tick stop losses so
typically I'm trading two to three
contracts sometimes four sometimes five
right that's kind of what I look at so
first trade you have 100% of your draw
down you're risking 1% right um I work
on a linear scale and those that have
been here for a while will understand
that is your starting if you lose a
trade you go down to 0.5
% if you win a trade you go up to
2% you can extrapolate that out even
more and go to 4% but it's not needed
and you can extrapolate this out and go
down to
0.25% right ultimately I don't I don't
think you need to is a general rule um
you need to backest this yourself and
understand this yourself um I
typically risk 1% get a winner risk 2%
get a winner and then I'm like basically
the the accounts are are more or less
there right so and sometimes if I'm
having a good month like in other
accounts I'll just jump straight to 2%
right and I'll just trade 2% as my
initial risk right so that's kind of how
I do it right there comes a point when
if you're on a losing
streak where it it makes sense to go the
other way right so say you're Z .25 you
have 2% dra down left you've lost eight
trades whatever and it's worked out that
you've got like 2% dra down left it's
better sometimes to go back to 1%
because it's like a Hail Mary the
account's basically gone you're going
have to spend months on it but then at
the same time it's all it's all down to
personal circumstance right because if
you for whatever reason can't afford
another evaluation and it's going to
take you time it's better for you to sit
there and trade that evaluation and
treat with the respect that it deserves
all right um so that's one side of it
the second side is the complete opposite
way right you can afford to blow
evaluations etc etc you have a model you
understand you understand how it works
you understand risk management for me
you start here right your job is not to
spend an eternity in evaluations your
job is to get out evaluation as quick as
possible and to trade funded accounts
that is your job in this market right
from from a risk management
perspective so that's evaluations for me
um
bunded accounts okay
so nothing really changes for the first
bit except I downsize right so if you've
got an end of day account you could
start 1% if you like um I like to take
smaller um trades at the start so
typically I start around
0.5% and then I
scale out to
1% to 2%
and I only scale this back
once this is my floor I don't go below
that right I'm not interested I'm here
to make money I'm not interested
in in being in taking it down to like
$100 losses Etc I'm not interested right
same rule same rules apply typically I
want to get 10 to 15 trades out of my
fed accounts if I'm on a losing streak
because I know that that based on my
models that's around the rough number of
Maximum losers over a period of 3 to
four years um consecutive losers um and
then basically once you get to a point
where there is a healthy margin inside
of your funded accounts I actually scrap
the percentages entirely and just trade
contracts um so at the moment on my Apex
accounts for example they're up nearly
30k each I trade strictly four and eight
contracts that is it I'm not interested
in anything else and I know that based
on my model my maximum risk is maximum
risk is 100 ticks and I'm aiming for
around 100 to 200 ticks my soft spot is
on the lower end
because 20 times 100
is two grand so typically I'm even
cutting trades at 50 ticks that's the
moment right because I just want if if I
get that base hit I just trade on my
stops if I then get pulled out of my
trade trade at 50 tick I'm done for the
day and that's it really that is kind of
my average way of trading at the moment
I'm going for trades with a lot less um
a lot less ticks in the stop Department
um so I'll trade four contracts and I'll
aim for anywhere from a 600 to a 1.2k
loss per per trade um and I will DC it
maximum of one time if if I'm suddenly
like okay I got an entry a bit early and
I should I should probably look to look
should have looked to end at here I will
DC another time bringing my average
entry up but then I will tight my stops
so my risk is only about 1.5k I'm not
looking to risk a massive amount um okay
so then this that takes me into the next
topic and it come it comes on to risk
management still is
um how do you handle losers right um so
I've said this I've said this to a lot
of people before and I've said this this
exact phrase is your job is in the
market is to find a model find an edge
understand how that works in the market
back test that like you would if you
were to trade that in a live environment
and then find that model in a live
environment and execute against it at
that point everything else is out of
your control the only thing that you
could do and change is a risk from a
risk management perspective to
understand how much you are on the hook
for every trade that's it and you know I
can sit here and I can sit there and
tell you all of the
all of
the types of Trades that you should or
shouldn't be taking or how to you know
think about a trade and understand but
the reality is is that this game this
game requires some kahunas you know it
requires some Bulls to click sometimes
it's a risky market and ultimately you
have to have the ability to to click you
have to have the ability to sit there
and be like I'm found my model I'm
confident in it I know that 60% of the
time it's a winner 40 30% of the time
it's a winner doesn't matter right and
it typically travels this many ticks etc
etc it's your job to do that and if you
can't accept the losers you need to back
test more that's my honest opinion
everybody that I know that has back
tested their model throughout and
throughout and throughout and gains the
utmost confidence in it is a profitable
Trader because theyve found a model that
works they've refined it and if your
model works and then you are to you're
trading in a l environment and suddenly
you go on a losing streak what's the job
that you should be doing you should be
journaling your trades understanding
going off and reviewing that trade what
could have happened differently did it
did it respect something on a higher
time frame did it do this did it do that
and then using those notes and the
learnings from those notes to refine
your
model that is it really
um so just
summarize EV vals there are two routes
there are is the normal route and is a
rich person's route rich person's route
is 2% trade it if you blow it you blow
it get another one and until it passes
right again don't just sit here gambling
be trading a model the normal route is
start 1% if you lose go to 0.5 if you
win go to 2% and basically that's kind
of my ceiling and floor I don't really
go less or more than that because that's
like a hybrid route but if you need to
and you you're on a big losing streak go
down to 0.25% because you can't afford
another evaluation or you need to wait
ET Etc go down to
0.25% um there gets a point like I said
where it makes sense for me to upscale
your trades instead of keep down scaling
you're on a losing streak you have
confidence in your model you understand
the
um the model works and if you have back
tested it enough you have that
confidence that after a certain number
of winners you're more likely to win so
it makes sense to upscale the reality is
can't there's no like set rule of eight
losing trades do this it's a general
rule of them if you feel like hey my
account's
done hay marry trade there's nothing
wrong with that right valuations are
there to to be passed and not to sit in
for months and months especially Futures
valuations because you get charged per
month right so that is my general risk
management strategy um I hope it helps
if you have any questions feel free to
tag me in Discord um but yeah
sh
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