Risk Management & Position Sizing Strategy for Trading
Summary
TLDRIn this crucial video, the channel emphasizes the importance of risk management for day traders, especially for those aiming for profitability. The speaker shares a personal experience with a bad trade on PDD, highlighting the necessity of a risk management strategy to prevent significant losses. The video outlines a three-step approach to risk management, focusing on understanding risk-reward ratios, setting proper stop-loss and take-profit levels based on daily support and resistance, and recognizing personal strengths and weaknesses to establish trading rules. The speaker encourages traders to practice discipline, track trades in a journal, and follow a set of personal rules to maintain profits, offering a free risk management crash course for further insights.
Takeaways
- 😀 Risk management is crucial for becoming a profitable trader, as it helps to preserve profits.
- 📉 The speaker emphasizes the importance of having a risk management strategy, using a personal trade on PDD stock as an example.
- 💰 The key to risk management is understanding and applying the power of risk-reward ratio, which should be considered in relation to account size.
- 🔢 For a $10,000 account, the speaker suggests risking about 1% per trade, which equates to $100 per trade.
- 🚫 Risking the same amount as you are making can lead to a break-even scenario or losses, especially with a 50% win rate.
- 📈 A better approach is to aim for a risk-reward ratio of at least 1:2, meaning you risk $100 to make $200.
- 🏆 For substantial growth, especially with a small account, aim for a risk-reward ratio of 1:3 or higher.
- 📊 Use daily support and resistance levels to set stop-loss and take-profit levels, ensuring a favorable risk-reward setup.
- 📝 It's essential to know your strengths and weaknesses as a trader and set rules for yourself to maintain discipline.
- 📉 The speaker shares personal rules like stopping trading after a certain time or after giving back a certain percentage of profits to avoid emotional trading.
- 📚 Keeping a trading journal and tracking all trades can help traders understand their actual risk-reward ratio and improve their strategy.
Q & A
What is the main focus of the video?
-The main focus of the video is on risk management strategies for day trading, emphasizing its importance for becoming a profitable trader.
Why is risk management considered crucial in day trading?
-Risk management is crucial in day trading because it helps traders control their losses, which is essential for maintaining profitability, especially with a small account.
What was the trader's experience with the stock PDD?
-The trader had a bad trade with PDD, which quickly dropped to daily support and resulted in a significant loss. However, the trader managed the risk and stopped out for a loss, which was about 1% of their account size.
What is the recommended maximum percentage of account size to risk per trade?
-The recommended maximum percentage to risk per trade is about 1% of the account size.
How does the trader suggest managing risk if you have a more conservative approach?
-For a more conservative approach, the trader suggests risking a fixed amount per day, such as $100, and adjusting the risk per trade based on the number of trades planned for the day.
What is the significance of the risk-reward ratio in trading?
-The risk-reward ratio is significant because it helps traders manage their potential losses and gains. A proper risk-reward ratio ensures that the potential profit is greater than the potential loss, which is key to long-term profitability.
What is the minimum risk-reward ratio a new trader should aim for?
-A new trader should aim for a minimum risk-reward ratio of 1:2, meaning they should risk $1 to make $2.
How does the trader calculate the risk for a trade?
-The trader calculates the risk for a trade by determining the entry point and the stop-loss level, and then assessing the potential profit target based on the risk-reward ratio.
What is the importance of having a trading journal?
-A trading journal is important for tracking trades, analyzing risk-reward ratios, and understanding a trader's strengths and weaknesses. It helps in maintaining discipline and improving trading strategies.
What are some personal rules the trader suggests setting for oneself?
-The trader suggests setting personal rules based on one's strengths and weaknesses, such as stopping trading after a certain time of day or after giving back a certain percentage of profits, to maintain discipline and prevent overtrading.
How can traders improve their win rate and profitability?
-Traders can improve their win rate and profitability by working on their risk-reward ratio, aiming for at least 1:2, and ideally 1:3 or more. Additionally, they should focus on managing their risk effectively and maintaining discipline in their trading.
Outlines
💰 Importance of Risk Management in Day Trading
The speaker emphasizes the critical role of risk management in becoming a profitable trader. They share a personal experience with a risky trade involving the stock PDD, which could have resulted in a significant loss. The key takeaway is the importance of having a risk management strategy to prevent substantial losses. The speaker outlines their strategy in three steps and encourages viewers to pay attention to learn how to manage risk effectively. They also highlight the significance of risk-reward ratio and how it can impact profitability, especially for traders with small accounts.
📊 Understanding Risk-Reward Ratio for Profitability
This paragraph delves deeper into the concept of risk-reward ratio, using a spreadsheet example to illustrate how it should be set according to one's account size. The speaker explains that risking a fixed percentage of one's account per trade is crucial, and they provide a formula for calculating this risk based on the number of trades taken per day. They also discuss the impact of win rate on profitability, demonstrating through scenarios that a better risk-reward ratio can lead to profitability even with a lower win rate. The importance of maximizing profits and minimizing losses is stressed, along with the goal of achieving a 50% win rate with a minimum 1:2 risk-reward ratio.
📉 Applying Risk Management to Trade Execution
The speaker shares practical advice on applying risk management to actual trades, using the stock PDD as an example again. They discuss how to set stop-loss levels and take-profit targets based on daily support and resistance levels. The importance of discipline in following a risk management plan is highlighted, along with the suggestion to practice with paper trading before applying strategies in real trading. The speaker also provides a step-by-step guide on setting stop-loss and take-profit levels on a chart, emphasizing the need for consistency and discipline in trading.
🚫 Setting Personal Trading Rules for Discipline
In the final paragraph, the focus shifts to personal discipline and setting trading rules based on individual strengths and weaknesses. The speaker shares personal rules they follow, such as stopping trading after a certain time or after giving back a certain percentage of profits, to prevent overtrading and emotional decisions. They stress the importance of tracking trades in a journal to understand one's risk-reward ratio and to identify patterns that may lead to losses. The speaker concludes by reiterating the importance of keeping profits and maintaining discipline in trading, offering a free crash course for those interested in learning more about their risk management strategy.
Mindmap
Keywords
💡Risk Management
💡Profitability
💡Account Size
💡Risk-Reward Ratio
💡Stop-Out
💡Daily Support and Resistance
💡Win Rate
💡Paper Trading
💡Trading Journal
💡Discipline
Highlights
The video emphasizes the importance of risk management for becoming a profitable trader.
Maintaining profits is more challenging than making them in trading.
A personal trading story involving a bad trade with PDD stock illustrates the importance of risk management.
Risk management involves setting a maximum percentage of capital at risk per trade.
Traders should aim for a risk-reward ratio of at least 1:2 for new traders, and higher for more experienced ones.
The video explains the calculation of risk-reward ratio based on account size and number of trades per day.
A 50% win rate with a 1:1 risk-reward ratio results in a break-even scenario, highlighting the need for a better ratio.
The presenter shares a strategy for managing risk with a 1:3 risk-reward ratio for substantial growth on a small account.
The importance of understanding and applying risk management before entering a trade is discussed.
A step-by-step guide on setting stop-loss and take-profit levels using daily support and resistance areas.
The presenter offers a free crash course on risk management strategies for interested viewers.
A detailed example of a PDD trade gone wrong and the subsequent short trade that recovered losses.
The significance of using daily charts to identify key support and resistance levels for risk management.
The importance of discipline and following set rules to manage risk effectively.
The presenter suggests using a trading journal to track and analyze risk-reward ratios and trading performance.
Personal trading rules such as stopping trading after a certain time or after giving back a percentage of profits.
The video concludes with the message that keeping profits is the most difficult part of trading and requires discipline.
Transcripts
risk management and day trading I
promise you this is going to be the most
important video ever on my channel
especially if you're serious about
becoming a profitable Trader
the most difficult part in trading is
not necessarily making money but keeping
your profit true story though I was in a
really bad trade trying to Long PDD
because it flushed down really quickly
to daily support and guess what I got
dumped faster than my ex-husband dumped
me so this is the stock in question PDD
you can see at the opening flash jump
from 49 here all the way down to
46.45 and near the lows at 39 at 10 30
so I was in about a thousand shares so
this trade I could have lost ten
thousand dollars but luckily I had this
one crucial component to my trading
strategy which is risk management so
when the stock dropped to 45 60s 45 70s
I stopped out for a loss so at 1 000
shares I lost about a thousand dollars
which is about one percent of my account
size and then in the next trade I
repeated the same strategy risking one
percent of my capital and made a decent
two thousand dollars on Baba 2009 PDD
shorts three thousand dollars on Nvidia
which are around two to three times a
while planned to risk on all these
trades if you want to learn how I
managed to do that pay attention to this
video as I'm about to explain my risk
management strategy in three steps also
please remember to smash the like button
right now if you want to receive a free
crash course on my risk management
trading strategy I'll tell you more
about that later on
risk management is a foundation in day
trading if you don't manage your risk
you never become profitable especially
if you have a small account let's be
real here no one can predict whether a
stock is going to go up or down with 100
certainty at any given time but if you
can though call me first
therefore as Traders we can never truly
control how much profit we make as we
can only profit from what the market
gives us but we can definitely control
how much money we lose this leads us to
the first step of risk management for
Traders understanding the power of risk
reward ratio
so I'm gonna show you the example of
setting a proper risk award ratio
according to account size on the
spreadsheet over here so let's say I
have a ten thousand dollars account
Capital you should be risking about one
percent maximum per trade so if I am
have ten thousand dollars my the one
percent will be a hundred dollars for
each trade I'm risking one hundred
dollars however if you're a little bit
more conservative and you'd rather risk
just one hundred dollars per day you can
do this as well so one hundred dollars
is your your max risk for the day but if
you take three trades per day two trades
per day that's gonna vary your amount of
risk per trade so if I take two trades
per day so for each trade I'm allowed to
risk fifty dollars so whichever method
you use that's fine but make sure you
stick with it your max risk per trade or
your max risk per day divided by the
number of Trades you take on the day so
have that figure in mind because this
risk amount is gonna be kept constant to
the best of your ability as a Trader for
every single trade that you take
so now that we understand the fixed risk
per trade concept let's look at risk of
word over here so I'm using the same ten
thousand dollars account Capital I'm
still risking one percent of my uh
account size per trade now let's look at
risk award now if I have a risk of a
ratio of one to one meaning that when I
make money I make a hundred dollars and
when I lose I lose a hundred let's see
what happens if I have a 50 win rate
meaning for every 10 trades I make money
on 5 out of ten
so if I'm making money on these five
trades 50 win rate and then lose money
on the other five and pretty much break
even now this is without considering
commissions or your platform costs so
essentially you're red if you're a risky
word is one to one and you have a 50 win
rate now 50 win rate is really
optimistic for new Traders I would say
for most new Traders your win rate is
probably 40 or less so that's a reason
most new Traders and most you know
Traders struggling they are unprofitable
because they are risking the same amount
as they are making so that means first
of all they have trouble uh managing
their stops or they have trouble with
the right strategy to let the trade work
out to maximize the winners but we're
gonna come back to that in a little bit
moving on to the second scenario you can
see we're still risking the same amount
of 100 per trade but now our risk award
is slightly better we're risking a
hundred dollars to make 200. so that
means with 50 win rate yes we can indeed
become profitable at five hundred
dollars now if we drop down to a win
rate of only 40 percent we are still
profitable so that means you are no
longer relying on being right you're
relying on managing the proper risk you
lose a hundred dollars per trade but
when you make money when you are right
you are at least two times
um your reward is two times greater than
your risk so this is at least the
minimum you should go for if you're a
new Trader remember with only a forty
percent win rate you can still become
profitable but ideally we want to work
towards 50 win rate and with a one to
two risk award ratio now if you're
trading a small account for your account
to really see some substantial growth
you need to work on your risk over ratio
of one to three or more so in this
bottom scenario here you can see we're
still risking 100 but this person knows
how to manage your risk so they only
lose a hundred but when they make money
the profits are three times more so when
you make money you make 300 300 for five
trades out of ten so fifty percent win
rate you can become very profitable you
can see you're growing a thousand
dollars on those 10 trades even with
only fifty percent ring rate now let's
say I drop my win rate down to only
forty percent you can see I'm still
profitable I'm still positive 600. let's
say you know how about 30 percent what
would that look like look even with only
30 win rate as long as I'm really good
at maximizing my profit and reducing my
risk to only a hundred dollars I can
still be profitable now but with the
magic really um comes in is when you
have a nicer win rate of around 60 on
average for most Traders 60 to 70 win
rate then you can become very profitable
if you have a one to two risky word
minimum but ideally one two three so if
you're trading a smaller account of one
thousand dollars that means your risk
should only be ten dollars if you're
trading five thousand dollars your risk
should only be 50. so you should not
take a more risk than you should this is
the guideline that you should be looking
at for all the trades you're taking in
the next step I'm gonna show you the
step-by-step process of how to properly
set your stop-loss area and take profit
on your chart so you always get one to
two or one to three risk a word before
we do so I want to remind you that you
can now receive a free training and one
of my favorite long strategies as well
as risk management crash course in the
link below I'll be going over one of my
favorite strategies in the market right
now for buying stocks and how to find
stocks to trade especially my risk
management strategies for that
particular setup so make sure to check
out the link below
so if you look at a daily chart on this
gap down this thing really didn't have
any support from 60 52 down to 47 it
didn't have support until about over
here the 50 46 dollars here so that's
the reason I learned over here forty six
dollars with a daily support area when I
first loaned the stock however I know
that if I'm wrong I need to be able to
get out because this thing has downside
all the way down to
40.39 so downside is potentially another
ten dollars to a downside so I obviously
don't want to have to lose another this
is what 29 40 46 minus seven dollars
so I know that you know I want to keep
my risk as close to 46 as I can so
that's the reason I kept it at V1
rejection over here uh when I first
loaned the stock at 46 you know it take
down to 45 30 really quick and you just
cannot reclaim back I'm not on a five
minute chart I use the five minute
mv-wop over here I always look at if the
stock is able to reclaim over the key
level 46 dollars over V web and to gauge
with this there's a potential reversal
and the fact that it isn't after this
thing dumped to 45 small pop to 46 the
fact that it just couldn't bounce it
cracked through the lower day that's why
I stopped out around 45 30s over here so
I lost you know almost a thousand pretty
much a thousand dollars on that trade on
the 1000 shares
um so one thing this thing cracks
through the lower day so pretty much I'm
risking over here around 80 cents 90
cents with slippage so that's amount of
risk I took
um on that particular trade for the long
side but it's it's really good stop
because if I didn't stop out they say
next leg went all the way down to 41 and
39 so what I did well is keeping my risk
at a one percent Mark stopping out when
the stock breaks down the low over the
day over here at 45 20s so I got out of
the long trade which I lost a thousand
dollars some now let's talk about the
shorts I took so after this thing
dropped from 45 down to 42 you can see
the small consolidation here on the five
minute chart over here let me maximize a
little bit a small small five minute
consolidation a lot of Wicks on the top
over here you can see five minutes Wicks
on the top and if you watch uh price
action video you know that Wix on the
top of the candlesticks means each push
each breakout each bounce is sold into
so this is a bearish candle formation
over here so that's the reason I shorted
it over here
I have 42 50s over here for these 250s I
showed it now when I shoot the stock my
risk is about v-wap area so around 4240
that's my entry my V my risk is about a
dollar over here
a dollar risk um over here on the
reclaim of this view up area so I will
probably risk only up to 43 dollars up
here uh around this area I probably
wouldn't want to risk a full one dollar
per trade but
um an 80 cent risk on this name downside
I know from 40 to 40s entry this thing
has a potential of giving me all the way
down to 39 why because that's a daily
support area that we drew earlier from
the daily chart so that's a pretty
decent
um risky word at least one to two so I'm
risking about 80 cents to make uh
somebody do the math Here We Go Again 42
[Music]
a few moments later so if you think
about it I'm risk
[Music]
I'm risk three risk award so that's why
this short on the on the short side for
PDD was really worth it even though I
just lost a thousand dollars on the long
side up here I shorted it down here from
40 to 50s all the way down to 39 so to
me this the second trade is a trade
that's well worth it
so here are the key takeaways for
setting the proper stop the risk area
your profit Target and the proper risk
reward so number one is to use the daily
key levels from the daily support and
resistance areas as your risk number two
use the upside resistance or downside
support as your daily profit areas this
is going to help you gauge your risky
word to make sure when you risk a dollar
you're potentially going to make two
dollars or three dollars or even more
and number three make sure all of those
key levels and daily support resistance
areas are drunk out on your charts like
our demonstration here before you enter
the trade now step number three is
knowing your strengths and weaknesses as
a Trader and set proper rules for
yourself so I can teach you all about
this risk management Max loss
calculating your risk for your account
Capital but none of that matters if you
are not disciplined enough to follow it
so that's why I always suggest that all
the Traders after having calculated your
risky word like I did in this video do
that in paper trading first do that and
apply it for all the strategies you're
trading and track them in a proper
trading journal it is from there that
you can see your risk award for all of
your trades are you risking ten dollars
to make ten dollars or ten dollars to
make five dollars I hope not um but
that's how you see your pro your actual
risky word after all the executions and
all the slippage so you should really be
tracking that so that's number one
number two is write down a list of rules
based on what you find in your trading
journal do you find that you start
losing money after about 11 A.M or 12
p.m Market time if so then that means
you should step back and stop trading
after that that's personally what I do
because that's why I find for my trading
journal I start losing everything I made
on the day after about 11 30 a.m in the
morning so that's why I'm now really
disciplined enough to stop trading I
also have another rule called the 30
rule meaning that if I find that I'm
giving back around 30 of my profit on
the day then I stopped trading this is
to prevent myself from over trading and
outstaying my welcome and revenge
trading try to make every single penny
back because it's inevitable sometimes
I'm good on the day I make some decent
trades I'm up a couple thousand dollars
then I become really bored and I'm
disciplined and give back more than 30
percent or fifty percent so now I'm
really conscious about my own emotions
and on trading performance if I give
back more than 30 on a day then I'm done
because hopefully you've realized this
by now watching this risk management
video the most difficult part in trading
is not necessarily make making money but
keeping your profit that's the hardest
part in trading and that's where most
Traders struggle the most they make a
hundred dollars here two hundred dollars
there and they lose everything and more
so that's a reason you should really
have a list of rules that you follow and
to stay disciplined track all of your
trades in your trading journal and truly
understand how much money you should be
risking for your account size
once again if you want to learn more
about my risk management strategy
including one of my favorite long setups
right now in the market then you can get
a free crash course in the link down
below if this risk management video
helped you out make sure to let me know
in the comment section below thank you
guys so much for watching as always I'm
the humble Trader and I'll see you guys
next time
[Music]
thank you
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