Mastering Risk Management: become a full-time trader!

Mastering Risk Management (to become a full-time trader!)

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In this Forex trading vlog, we go in-depth into risk management in Forex trading with 5 tips to better manage your money. Vlog #451.

“Most People Think Risk Management Is About Reducing The Number Of Losses”. That's a very limiting definition of risk management.

Here are 5 things that really help:

  1. Risk-Of-Ruin
    1. Risk of ruin:
    2. Should you risk 1% per trade? Watch this:
  2. Combining Systems
  3. External Income
    1. Trading as your only income video:
  4. Online Account Protection
  5. Compute Leverage (watch more!)

Watch Next: Series on risk management

Read Full Transcript

- What's going on traders? Welcome back to Hong Kong. Today I want to share with you my thoughts and my advice on risk management. This is something I learned a lot about through the past few years. I used to think that risk management was a boring topic. Very limiting lessons in that and that I could manage my risk myself. But I learned over time that there's a lot more to it, to risk management and I want to share with you some tips. I've got five and I want to share with you how you can manage your risk better. Those are things you have to think about and that you have to implement properly when you trade live. Especially if you trade for other people and especially if wanna manage money in your life. If that's your goal, then learn to manage your risk for your wealth. If that's not your goal, still learn to manage your risk very well. The principle I'll share with you today, are things that will make you a profitable trader in the long term. Now if your goal is to be short term, I wanna make a lot of money soon, that's fine, but you won't be around for long. If your goal's to stay in trading for the long term, which means getting big results in the long term, then I want to share with you these things. These you have to think about them and apply them properly, so you can see better result over time. Now most people think, and here's the biggest myth, that risk management is only about reducing the number of losses and that you should just think about not losing and then you will make money. And I found out that is not what it is though. Now, here's the thing, people think that if you manage your risk well, it doesn't matter how much money you risk per trade. It doesn't matter anything of that. You can make some money because you have few losses and you don't lose much money and that's not the case because we are all, as traders, we can go through losses, shut down, tough times. And those are the times that's gonna shape you as a trader. They shape you in the fact that are you're gonna be losing and crying after or are you gonna fight the battle and show up after. And that's the big difference. People that think risk management is only about the losses, or not having them at all, or minimizing them. They don't think about the other way round. and when they have to go into a battle like this to kind of fight, then they have no clue what to do. They're just stuck there. And that's not where you want to be at all. So here are the concept you have to think about putting in your trading. The first one is the risk of ruin. This is something I've talked about before, so I won't talk for hours about this, I'll put a video in that you can watch about the risk of ruin. But in short term, you want to decide how much you can risk per trade. What's the maximum you can go on one trade. Calculate and make sure that your risk of ruin is 0%, which means you can not ever blow up the account. I just talked with a new member of the Desire to Trade Academy that serious risk of ruin was 10%. And 10%, although that might seem low, 10% of blowing up your account. It compounds over a year and it becomes bigger and bigger over time, which means that you are pretty much likely to blow up your account. That's the thing you want to correct pretty fast. You want to be able to master this and make sure that you have no chance of blowing up your account because new capital should be seen in your account. People say it's the only trade of money you can afford to lose, but I don't agree with that because you don't want to lose the capital that you traded with. You can lose a part of it and that's gonna be a part of the normal drawdowns, but you can't lose all of it. That's your business, that's an investment which you should be responsible for. And so that's the very important thing. So if you're wondering how much you can risk on a trade right now, watch video below. It's gonna tell you exactly what you have to compute. I'll also put an article on that as well because I don't want to go through the same stuff all the time, but that's it for the risk of ruin. Now the other thing is, let's say as a trader that you combine systems, which means that you have a system for breakouts. A system for pull back and a system for reversals or whatever you think about. So whatever system you have, now try to find out, are these systems correlated, and if the answer is yes, you might be a little bit in a problem. If they're not correlated, then that's fine, but you want to be able to build a risk management profile based on these systems and they should not be correlated, because if they are correlated then you would just multiply your drawdown. And yes, your gains will be multiplied, but your drawdown will be multiplied and that really is not cool at all. So, the more you do your research and you prepare your stuff, the more you can know, well, these systems are correlated, so when one fail, I won't trade the other one. Or when this one does this, I won't trade the other one. Or when they all have setup, I'll take all the setup, because they're not correlated and I'm gonna minimize my risk. But you wanna compute your risk management with those systems and make sure that you can sustain a journal for each and maybe even have a different account for each, so you can separate everything. Or at least that you're not gonna blame your drawdown because you have multiple system, that you are minimizing the drawdown effect. And that's done by putting some curves together of your system equity curve and just dissing out what works. But very important to understand. And you get per-fund correlation if you want with some data analysis tools. So, is the system PNL correlated with the other one? Like what's the correlation? So, if you have a strong correlation, it means that both going in the same direction. It could be that when one lose, the other one wins and that would be fine, but it could be also that when one wins, the other one wins, and that would not be fine in my opinion. So try to be careful. Then, you want to think about your external income. So, what if you have no income from trading in a month? What do you do, and that's a thing you have to think about. Risk management, in the word itself, the term itself, means taking care of the risk. Looking at the risk around you and taking care. So, if you don't take care of the risk, and you only think it's about not having losses or be careful of the risk of ruin. Well, that's only part of it. Think about the other things around, like what can happen? And make a plan for those. One thing that can happen for sure, is not having income in a month from trading. So how do you deal with that, what do you do? You take income from outside, do you call someone? Call a friend, you talk with your spouse or your husband or whatever? What do you do to find an income for that month? And that's gonna be a point to define. So, are you gonna have external sources of income? And if that's yes, identify them, make sure they work. Make sure that they are not correlated with trading, of course, if you had no trading income one month, you still have this other income coming in. They can not be correlated, otherwise it's gonna be tough. That's very important to understand and very important to assess and take care of. Point number four, how about take measures to not lose your money in your account online? So there's been some cases, and I heard that before, of people that, they get so little money from their trading account for some reason. I know brokers have been working measures to prevent that so the fact that you have to withdraw in your own account. But what if the system crash or what if something happens and you can not access your account online or whatever. Do have something on the side, do you put all your money in your trading account and just expect to compound it and make it really big? Or you take some money out, for example where you will need money and you cannot wait for the broker to withdraw the money and give you back the money in your account. That's important reason also, what measures do you take so that people won't know your password for your account and they won't be able to do anything with that. Those are important things. And that bites me, and changing your password often, going back and withdrawing some money as you earn income, to put it in other asset class are the things that you want to work on. And that's really important as well, to manage that risk. Fifth thing is, you're gonna have to compute your leverage and that's just a simple fact, but based on the risk of ruin. I'm not sure why I put this point at the end, but understand leverage, leverage is about how much will you need per trade? And that also means that you might have a big leverage and then you make a mistake and you pitch in size and you turn a huge trade. How do you react to this, what's the rule? And if you don't know, you might say, oh well, just leave it open, see what happens. And hopefully it can make some money. But if you are smart a little bit. And maybe you've even gone through that, which I did, you will wanna close the trade pretty fast. And you will wanna cut your losses short. Its a mistake, it sucks, but you are in a place where you need to be making those decision before they happen, so you know what to do in that case. And so leverage is only a small part, but you are gonna have to compute that based on how many trades you take on average. What's the maximum of trades open at the same time and what you have in your account. So, do you take five trades at the top, maximum, and then your account with your leverage now only allows you to take three. You don't want to be stuck changing your leverage because you have to take a trade. That won't work, so plan it beforehand. Compute that beforehand. You can find the math in different websites and compute that to other places. Your broker can help you with that. Those are things you have to think about. So this is a run down, there's a lot more we can go into. We have an awesome course in the Academy about risk management that you can go check out if you are a member, if not, we'll put a link below where you can sign up and check it out. But if you like my talk, comment below, as always. Comment below with your thought there. Here are some of comments from the past. I really appreciate that you guys are always leaving comments down in the comments section. Subscribe if it's not done yet and I'll catch you back here for another video in Hong Kong tomorrow, ciao.

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About Me

My name is Etienne Crete (from Montreal, Canada). I'm a swing Forex trader (who has the chance to travel the world anytime) and help aspiring Forex traders develop a trading method that works for them so they can produce income allowing them to live with more freedom.

You see, a lot of aspiring Forex traders lack the confidence to pursue their dreams. I'm there not only to help you develop your confidence but also to implement the tactics that are proven to give you results. You'll develop Forex trading discipline and the other skills you need in NO time!

Ultimately, you'll get to experience what aΒ day in the life of a Forex trader truly looks like, but you'll also have to be consistent with your Forex weekly review!

I produce a traveling Forex trader vlog and host the Desire To Trade Podcast. I was fed up with the β€œfake” millionaire traders and the β€œget-rich-quick-trading guys”. That's why you can expect more free content from me than what other people charge for!

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Mastering Risk Management: become a full-time trader!