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.

Outlines

00:00

🔍 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.

05:02

📈 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.

10:03

💡 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.

Keywords

💡Risk management

Risk management refers to the process of identifying, assessing, and controlling the level of risk involved in trading. In the video, the speaker emphasizes the importance of setting clear rules for managing risk, especially in relation to evaluations and funded accounts. It involves strategies like limiting drawdowns, reducing position sizes, and adjusting risks based on market performance.

💡Drawdown

Drawdown represents the reduction in capital from peak to trough during a trading period. In the video, the speaker discusses limiting drawdowns, using a $10,000 drawdown as an example to manage risk across multiple trades. Traders are advised to spread the drawdown over several trades to avoid significant losses.

💡Evaluation

Evaluation is the process traders go through to qualify for funded accounts, where they are assessed based on their trading performance. The speaker discusses risk management in evaluations, advising traders to take 10 to 15 trades using a portion of their drawdown and explaining how they should adjust risk based on winning or losing trades.

💡Funded accounts

Funded accounts are accounts provided by firms that allow traders to trade with the firm's capital. In the video, the speaker explains that traders should approach risk management differently in funded accounts compared to evaluations, often starting with smaller risks (e.g., 0.5%) and scaling up as they gain profit.

💡Stop loss

A stop loss is a predetermined price level at which a trader exits a losing trade to prevent further loss. The speaker frequently mentions using stop losses in terms of ticks, adjusting the number of contracts traded based on the size of the stop loss. For example, with a 100-tick stop loss, they trade two contracts.

💡Linear scale

A linear scale in risk management refers to a consistent increase or decrease in risk percentage based on trade performance. The speaker follows a linear scale strategy, where a winning trade increases risk, and a losing trade decreases it. This helps maintain consistency and minimize risk during losing streaks.

💡Backtesting

Backtesting is the process of testing a trading strategy on historical data to ensure it works before using it in live trading. The speaker emphasizes the importance of backtesting a model to gain confidence in its effectiveness. Traders should refine their models through backtesting to avoid excessive losses during live trading.

💡Scaling

Scaling refers to adjusting the size of trades based on performance. In the video, the speaker describes how they scale up their trades when performing well by increasing the percentage risked per trade (e.g., moving from 1% to 2%) or reducing it during losing streaks to 0.5% or lower. Scaling helps manage risk dynamically.

💡Hail Mary trade

A 'Hail Mary trade' refers to a last-ditch effort to recover from significant losses, often involving higher risk. The speaker suggests that if a trader's account is close to being blown, it may be worthwhile to increase risk for a final attempt, although it’s generally a high-risk approach. This is contrasted with more conservative risk management techniques.

💡Consecutive losses

Consecutive losses refer to a series of losses that occur one after the other without a win in between. The speaker mentions the need to prepare for consecutive losses, especially in terms of managing risk, by adjusting position sizes or stop losses to avoid significant capital erosion during a losing streak.

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