Best Risk Management Strategy to Make Millions with Trading

Summary

In this video, a successful seven-figure trader shares the key to their profitability: risk management. After years of struggle, they discovered that risk management, not just psychology or technical skills, was the catalyst for scaling their trading success. They explain how managing risk through percentage-based systems, rather than focusing on dollar amounts, allows for more consistent, sustainable growth. The trader also outlines different risk management strategies, from conservative to more aggressive approaches, depending on the trader's objectives. The ultimate goal is to stop losing money, then develop a winning strategy to achieve consistent profits over time.

Takeaways

• 😀 Understanding risk management is the key to becoming a consistently profitable trader, especially when scaling your trading approach.
• 😀 Without proper risk management, it's impossible to scale and sustain long-term success in trading, even with good technical skills and psychology.
• 😀 Risk management is essentially managing the percentage of your account balance you're willing to risk on each trade, not a fixed dollar amount.
• 😀 The mistake many traders make is focusing on dollar amounts instead of percentages. Risk should always be calculated as a percentage of the account balance.
• 😀 A consistent percentage risk per trade ensures financial stability, even if losses occur. You can't risk large amounts on random trades and expect consistent success.
• 😀 Risk management is essential for attracting investors. They want to see consistency in your risk and reward strategy, not random fluctuations.
• 😀 The three primary approaches to risk management are conservative (0.5-1%), recommended (1-2%), and risky (3-5%). Each approach is suitable for different trading strategies and risk appetites.
• 😀 It's crucial to stick to your chosen risk percentage throughout the month, regardless of wins or losses, to maintain a balanced and consistent performance record.
• 😀 Starting with a lower risk percentage (like 1%) is a good strategy for new traders. As experience grows, traders may move towards a higher percentage risk for larger accounts.
• 😀 Seasonal factors affect risk management. It's common to adjust risk levels based on market conditions, such as taking higher risks in months where trading conditions are more favorable (e.g., January through March).

Q & A

What is the key factor that helped the speaker scale their trading?

Risk management is the key factor that helped the speaker scale their trading. They emphasize that while psychology and technicals are important, without proper risk management, trading success is not sustainable.

Why is risk management so important in trading?

Risk management is crucial because it ensures that you don't risk your entire account balance on a single trade. By managing risk, you protect your capital, which is necessary for long-term success. Without it, you're likely to lose all your funds.

What does risk management in trading actually mean?

Risk management in trading means controlling how much of your account balance you're willing to risk on each trade. It involves setting a percentage of your account to risk per trade to avoid catastrophic losses.

What is the difference between percentage-based and dollar-based risk management?

Percentage-based risk management focuses on the proportion of your account balance you're willing to risk (e.g., 1% of your account), while dollar-based risk management focuses on risking a fixed dollar amount (e.g., $100 per trade). The former is more scalable and consistent.

What is the main mistake traders make with risk management?

The main mistake traders make is thinking that risk management is about money, not percentages. Risking a fixed dollar amount can lead to large swings in account balance, while percentage-based risk ensures more consistent results.

How should you calculate your risk per trade?

You should calculate your risk as a percentage of your total account balance. For example, if you have $11,000 in your account, risking 1% means risking $110 per trade. This allows you to manage risk consistently regardless of the account size.

What are the different risk management approaches, and who should use each?

There are three main risk management approaches: the conservative approach (0.5% to 1% risk per trade), the recommended approach (1% to 2% risk per trade), and the risky approach (3% to 5% risk per trade). The conservative approach is for traders on lower time frames; the recommended approach is ideal for most traders, and the risky approach is for personal accounts or small flipping accounts where higher risk can be tolerated.

Why is it important to stick to the same risk percentage throughout the month?

Sticking to the same risk percentage throughout the month helps to maintain consistency and reduces emotional trading. It also allows you to track your performance more accurately without the fluctuations caused by changing risk percentages.

What is the recommended risk percentage for traders?

The recommended risk percentage for traders is between 1% and 2% per trade. This allows for a balanced approach that limits losses while still providing opportunities for growth.

How does the speaker manage risk during different months of the year?

The speaker risks more during the months with historically better trading conditions (e.g., November to March) and lowers their risk during slower months (e.g., June to August). This approach is based on statistical patterns they've observed in their trading over the years.