Risk Management and How to Handle Losing Trades

Summary

The 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.