Quote from: teosanru on November 14, 2019, 08:00:08 AM

Most of the people think that Trading is merely learning to read charts and then buying low and selling High. But that is absolutely wrong! This is the main reason why certain newbie Traders don't make money. I would tell you a secret which most of the Trade gurus don't tell you while they teach you trading. first of all to understand the Importance of Risk Management I would like you to go see this Post of Mine:

https://bitcointalk.org/index.php?topic=5199458.msg53013312#msg53013312

Now going through the basics. I would teach you how to learn basics of Risk Management and you will learn how to do a disciplined trading.

STEP 1: Understanding Risk to Reward Ratio
Risk to Reward Ratio is the most solid strategy provided by Risk Management Theory. It is called Risk to Reward but actually is Reward to Risk Ratio It basically is a ration which is developed by this formula

Profit you can earn per trade(Difference from Target to Entry)
_________________________________________________
Risk you take per trade (Difference from Stop Loss to Entry)

This means for example if you take a trade at $10000 and your pattern says a target of $10200 and stop loss at $9900. Now feeding in the values in formula:

$10200-$10000 $200 2
____________ = __________ = _ = 2:1
$10000-$9900 $100 1

This signifies that there is double the profit potential than the assessed Risk. Now Ideally people would say that 2:1 is the best ratio but I think it should be the minimum atleast until you become an intermediate trader who can have control on his emotions. How this is important? I would quote my own post:

Quote from: teosanru on November 07, 2019, 05:50:33 PM

I think a very important concept pretty dear to my heart which you really forgot is Risk Management. I consider 80% of success in Trading comes with Risk Management. If you can limit the amount of risk in every trade to maximize your return. You just don't need any guidance in selecting your trades. Because if you are trading even with a 60% win strategy a good risk management technique can increase the returns upto 80% because it teaches you how to earn greater from the trades you win and lose less from trades you lose by setting a favourable Risk to Reward Ratio. Let's consider an example to understand this.

Case 1: 60% win ratio with 1:2 Risk Reward
You take a Risk to Reward Ration of 1:2 which means you Buy at 9000 and set your target at 9200 but keep your Stop Loss at 8900. Which means maximum loss is $100 but max profit is $200. Now if you keep this ratio over a period of say 100 Trades.

Now Assuming you get profitable in 60 trades which means you earn 60x200 which is $12000 and you lose 40x100 which means $4000. Your net gain still is $8000.

Case 2: 80% win ratio with 1:2 Risk Reward
You take a Risk to Reward Ration of 1:2 which means you Buy at 9000 and set your target at 9100 but keep your Stop Loss at 8800. Which means maximum loss is $200 but max profit is $100. Now if you keep this ratio over a period of say 100 Trades.

Now Assuming you get profitable in 80 trades which means you earn 80x100 which is $8000 and you lose 20x200 which means $4000. Your net gain still is just $4000 with a better strategy.

This is why people say that it's better to have a better Risk Management strategy.

STEP 2: Understanding Power of Compounding
What most traders forget is that aim is to be profitable in long term and earn money and not to just hit a good trade today. So bring the power of compounding in your play. Set small daily targets like 2%-3%. This might seem small but no matter what is your account size this is the only way to earn profits.

Have a look: If you have an account size of $1000 and earn just 2% daily. Trust me it might seem very easy but it isn't that easy to earn 2% consistently unless you keenly apply Risk management. Now,

Earning 2% for merely 100 days would make your capital like: 1000 x (1+0.02)¹⁰⁰ .
The answer would be $7376. This means you would make 7 times of your capital merely by earning 2% daily for 100 days. [People think that compounding is only a long term concept but truth is it can be applied to short term trading too.

STEP 3: Don't Risk everything in one day
You are fighting a war against the world and not merely a battle. A true warrior doesn't gets exhausted in one battle because he is here to fight a war. So never ever risk more than 3% of your capital in a day. Now you have to determine what is risking your capital. we have studies in step 1 that maintain a risk to reward ration so this risk ratio should be something in numeric terms say for example taking example taken in step 1 Risk was of $100. Now if your total capital was $20000. You are risking 0.5% in a trade which is way below the risk cap of 3%
$100
______ = 0.5%
$20000
So no matter how much capital you use in a trade but the risk per trade should never ever exceed what is the maximum risk cap.

These are basic 3 steps towards risk management. If you have any questions I would love to answer them. I would even have a FAQ below this thread about whatever major questions everyone is getting. Moreover I would love to come up with Part-2 of this thread where I would teach some intermediate principles. Stay tuned and I would love seek opinions of anyone who are not in agreement with these points.

Thank you for sharing your thoughts, I am trading since 2016 but I have not equipped my self that too much TA.
I am eager to learn but I am not really good with numbers and formula sometimes I feel really down bcoz of understanding things slowly.
I dream to be a good trader someday.