Risk Management & Position Sizing Strategy for Trading

Summary

In 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

00:00

💰 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.

05:00

📊 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.

10:03

📉 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.

15:04

🚫 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.

Keywords

💡Risk Management

Risk management in the context of the video refers to the process of identifying, analyzing, and accepting or mitigating uncertainty in investment decisions. It is a crucial aspect of day trading, as it helps traders to control their losses and protect their capital. The video emphasizes the importance of risk management as a foundation for profitability in trading, especially for those with small accounts.

💡Profitability

Profitability in this video script is the ability to generate a profit from trading activities. The speaker asserts that the most difficult part of trading is not making money but keeping profits. This concept is central to the video's theme, as it highlights the importance of not only making profits but also managing risk to ensure that profits are preserved over time.

💡Account Size

Account size refers to the total amount of capital a trader has available for trading. In the video, the speaker uses account size to illustrate how much a trader should risk per trade, suggesting that a trader should risk about 1% of their account size per trade. This concept is integral to the risk management strategy discussed in the video, as it helps to determine the appropriate amount of risk for each trade.

💡Risk-Reward Ratio

The risk-reward ratio is a fundamental concept in trading that compares the potential loss (risk) of a trade to the potential gain (reward). The video emphasizes the importance of setting a proper risk-reward ratio according to account size, suggesting that a ratio of 1:2 or higher is ideal. This helps traders to ensure that their potential gains outweigh their potential losses, which is key to long-term profitability.

💡Stop-Out

A stop-out is an action taken by a trader to close a losing trade at a predetermined price to limit the loss. In the script, the speaker describes a situation where they had to stop out of a trade on PDD when the stock dropped to the 45-60s, resulting in a loss of about 1% of their account size. This is an example of risk management in action, where the trader takes control of their loss to prevent further damage to their account.

💡Daily Support and Resistance

Daily support and resistance levels are price points on a stock's chart that historically have acted as barriers to price movement in either direction. In the video, the speaker uses these levels to set their stop-loss and take-profit points, demonstrating how traders can use technical analysis to inform their risk management strategy.

💡Win Rate

Win rate in trading refers to the percentage of trades that result in a profit. The video script discusses the importance of having a realistic win rate and how it affects profitability. For instance, the speaker mentions that a 50% win rate is optimistic for new traders and that many may have a win rate of 40% or less, which is why managing the risk-reward ratio is so critical.

💡Paper Trading

Paper trading is a simulated form of trading where no real money is used, allowing traders to practice and test their strategies without risk. The video encourages traders to apply their risk management strategies in paper trading first to ensure they understand the concepts and can apply them effectively in real trading scenarios.

💡Trading Journal

A trading journal is a record of all a trader's transactions, including details about each trade, such as entry and exit points, risk taken, and profit or loss. In the video, the speaker emphasizes the importance of maintaining a trading journal to track performance, understand risk-reward ratios, and identify personal strengths and weaknesses in trading.

💡Discipline

Discipline in trading refers to the ability to consistently follow a set of rules or strategies, even in the face of market volatility or emotional temptation. The video script highlights the importance of discipline in adhering to risk management rules, such as not trading after a certain time or stopping after giving back a certain percentage of profits, to maintain profitability.

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