Risk management

Risk management

Learning Outcomes

  • Introduction & Understanding of Risk Management
  • Prime Capital vs Risk Capital, Playing the Game of Probabilities
  • Compound Interest, Exponential Growth, Lot Sizing

Learning Outcomes

How Much Money We Should Invest In Trading? Invest In Trading? Invest In Trading?

Prime Capital

  • This is the amount you need to maintain your daily life e.g. House rent, food, clothing, utility bills, educational expenses, medical expenses & traveling expenses etc.

Risk Capital

  • This is the extra amount/saving which (if lost) will not be affect our daily life maintenance. Loans/Liabilities doesn’t count towards risk
    capital.

How Much Money We Should Invest In Trading? Invest In Trading? Invest In Trading?

Prime Capital

  • This is the amount you need to maintain your daily life e.g. House rent, food, clothing, utility bills, educational expenses, medical expenses & traveling expenses etc.

Risk Capital

  • This is the extra amount/saving which (if lost) will not be affect our daily life maintenance. Loans/Liabilities doesn’t count towards risk
    capital.

Why Should I Invest When There Is No  Certainty In Trading?

  • There is nothing certain in this world, not even life or this earth itself. Sooner or later everything comes to an end which could be today or tomorrow, so everything is on RISK. To spend this life successfully we need to manage these risks. Managing risk doesn’t mean avoiding them, it actually means to be ready to face those risks so when they come to us we are able to reduce the impact of potential damage carried by this risks. So risk management if the KEY for a successful life.
  • Trading is not different than life, it carries risks too which could wipe out all of your invested capital if you don’t manage these risk or don’t know how to manage them.

Why Should I Invest When There Is No  Certainty In Trading?

  • There is nothing certain in this world, not even life or this earth itself. Sooner or later everything comes to an end which could be today or tomorrow, so everything is on RISK. To spend this life successfully we need to manage these risks. Managing risk doesn’t mean avoiding them, it actually means to be ready to face those risks so when they come to us we are able to reduce the impact of potential damage carried by this risks. So risk management if the KEY for a successful life.
  • Trading is not different than life, it carries risks too which could wipe out all of your invested capital if you don’t manage these risk or don’t know how to manage them.

An Estimated 90% Trader Loose Money 90% Trader Loose Money 90% Trader Loose Money In Forex, So Is it Good or Bad?

  • Forex is a zero sum game, money is just exchanging the hands, not being generated. So the more people loose money the more chance are of earning.

Why 90% Trader Loose Money?

  • Most of losers don’t know about Trading Psychology & Money Management.
  • The one who knows about it, doesn’t know the importance of it.
  • The one who knows the importance, fails to implement it.

Jesse Livermore was a legendary trader who was pioneer in volume studies in early 20th Century. Many people knows this BUT what they don’t know is that he was bankrupted twice in his trading career. Despite all his skills, he shown no respect to risk management.

An Estimated 90% Trader Loose Money 90% Trader Loose Money 90% Trader Loose Money In Forex, So Is it Good or Bad?

  • Forex is a zero sum game, money is just exchanging the hands, not being generated. So the more people loose money the more chance are of earning.

Why 90% Trader Loose Money?

  • Most of losers don’t know about Trading Psychology & Money Management.
  • The one who knows about it, doesn’t know the importance of it.
  • The one who knows the importance, fails to implement it.

Jesse Livermore was a legendary trader who was pioneer in volume studies in early 20th Century. Many people knows this BUT what they don’t know is that he was bankrupted twice in his trading career. Despite all his skills, he shown no respect to risk management.

Game Of Probabilities Probabilities Probabilities

Magical Systems (trading gurus are scared with my 100% profitable system), Secret Code Cracked, NO Loss Strategy & Super Indicators. All are the just lies & scam.

  • There is no method, strategy, tool or indicator ever been invented which can give you 100% accuracy imagine if it happens you can get in $99? 1 million dollar? No it will be priceless & more important markets will stop functioning as sooner or later every one will have that magical system, when no one will loose, how anyone can earn?

How to make money when you don’t have any 100% success system?

  • When you don’t have 100% chances on winning in a game, it becomes Game of Probabilities. The more probabilities you accumulate, the more chances you will have of winning.
  • Secondly, you don’t invest all of or most of your capital when you don’t have 100% chances of winning. You have to take recommended minimum & calculated risk and let the probabilities work for you.

Game Of Probabilities Probabilities Probabilities

Magical Systems (trading gurus are scared with my 100% profitable system), Secret Code Cracked, NO Loss Strategy & Super Indicators. All are the just lies & scam.

  • There is no method, strategy, tool or indicator ever been invented which can give you 100% accuracy imagine if it happens you can get in $99? 1 million dollar? No it will be priceless & more important markets will stop functioning as sooner or later every one will have that magical system, when no one will loose, how anyone can earn?

How to make money when you don’t have any 100% success system?

  • When you don’t have 100% chances on winning in a game, it becomes Game of Probabilities. The more probabilities you accumulate, the more chances you will have of winning.
  • Secondly, you don’t invest all of or most of your capital when you don’t have 100% chances of winning. You have to take recommended minimum & calculated risk and let the probabilities work for you.

Compound Interest & Exponential Interest & Exponential Interest & Exponential Growth

  • Compound interest is the most powerful force in the universe. 
    Albert Einstein

Lets take a real life example

  • A person borrowed Rs. 50,000/= for 6 month with fixed 20% interest. He agreed to pay back Rs. 60,000/= after 6 month. The lender placed another condition that if the borrower gets late in paying back the loan amount, he only needs to pay 1 paisa (Rs. 0.01) as penalty for first day, which will doubled next day, if it gest to third day, the second day penalty amount will be doubled & so on. There no interest will be charged for these extra days.
  • What do you think how much borrower needs to pay back if he get late around 40 days? Think of a maximum figure.

Compound Interest & Exponential Interest & Exponential Interest & Exponential Growth

  • Compound interest is the most powerful force in the universe. 
    Albert Einstein

Lets take a real life example

  • A person borrowed Rs. 50,000/= for 6 month with fixed 20% interest. He agreed to pay back Rs. 60,000/= after 6 month. The lender placed another condition that if the borrower gets late in paying back the loan amount, he only needs to pay 1 paisa (Rs. 0.01) as penalty for first day, which will doubled next day, if it gest to third day, the second day penalty amount will be doubled & so on. There no interest will be charged for these extra days.
  • What do you think how much borrower needs to pay back if he get late around 40 days? Think of a maximum figure.

Lot Sizing

Magical Systems (trading gurus are scared with my 100% profitable system), Secret Code Cracked, NO Loss Strategy & Super Indicators. All are the just lies & scam.

Formula:
Account Size x 0.01 = Risk per / SL in pips = Pip Value
(Equity) Trade
$10,000 x 0.01 = $100 / 50 = $2 

Lets see what would be the scenario in case of continuous winning or loosing on $10,000 account. 

Lot Sizing

Magical Systems (trading gurus are scared with my 100% profitable system), Secret Code Cracked, NO Loss Strategy & Super Indicators. All are the just lies & scam.

Formula:
Account Size x 0.01 = Risk per / SL in pips = Pip Value
(Equity) Trade
$10,000 x 0.01 = $100 / 50 = $2 

Lets see what would be the scenario in case of continuous winning or loosing on $10,000 account.

Loosing Scenario Scenario Scenario

No Of TradesTotal Balance1% Of Total BalanceEquity
110,0001009,900
29,900999,801
39,80198.019,703
49,70397.02999,606
59,60696.0596019,510
506,11161.111723956,050
1003,69736.972963763,660
2001,35313.533300491,340
500660.66368515666

Loosing Scenario Scenario Scenario

No Of TradesTotal Balance1% Of Total BalanceEquity
110,0001009,900
29,900999,801
39,80198.019,703
49,70397.02999,606
59,60696.0596019,510
506,11161.111723956,050
1003,69736.972963763,660
2001,35313.533300491,340
500660.66368515666

Winning Scenario Scenario Scenario

No of TradesTotal Balance1% of Total BalanceEquity
110,00010010,100
210,10010110,201
310,201102.0110,303
410,303103.030110,406
510,406104.06040110,510
5016,283162.8348338000000116,446
10026,780267.803349427,048
15072,436724.3582032000000573,160
2001,433,394724.358203200000051,447,728

Winning Scenario Scenario Scenario

No of TradesTotal Balance1% of Total BalanceEquity
110,00010010,100
210,10010110,201
310,201102.0110,303
410,303103.030110,406
510,406104.06040110,510
5016,283162.8348338000000116,446
10026,780267.803349427,048
15072,436724.3582032000000573,160
2001,433,394724.358203200000051,447,728

How To Create A Successful Online Trading System Which Gives Consistent Results?

  • A successful online trading system consist on (Trading Edge, Confluence of Probabilities & Strict Money Management).

Trading Edge

  • Trading edge is any method or technique which gives you advantage over other market players so the trader have higher chance of winning over his/her competitors in the market.

Confluence of Probabilities

  • It’s a point or an area where 2 or more probabilities are accumulated to create a directional bias/opportunity which has higher degree of success.

Strict Money Management

  • Using =< 1% risk per trade rule.
  • Using =< 5% over all risk on running trades.

How To Create A Successful Online  Trading System Which Gives Consistent Results?

  • A successful online trading system consist on (Trading Edge, Confluence of Probabilities & Strict Money Management).

Trading Edge

  • Trading edge is any method or technique which gives you advantage over other market players so the trader have higher chance of winning over his/her competitors in the market.

Confluence of Probabilities

  • It’s a point or an area where 2 or more probabilities are accumulated to create a directional bias/opportunity which has higher degree of success.

Strict Money Management

  • Using =< 1% risk per trade rule.
  • Using =< 5% over all risk on running trades.

Trading Trading Trading Checklist

  • Check Economic Fundamental News on forexfactory.com (Don’t place the trade in a pair, having the currency of High Impact News coming in less than an hour).
  • Keep open forexlive.com & switch on the notifications in google chrome to know any unexpected news immediately.
  • Mark the support & resistance levels in Daily & H4 timeframes.
  • Determine the market condition with HH-HL/LH-LL in Daily, H4 & H1 timeframes.
  • You may find the trade in one the following :
    • Trend Continuation
    • Trend Reversal (Trend Reversal in Range).
    • Breakout & Bounce/Retest

Trading Trading Trading Checklist

  • Check Economic Fundamental News on forexfactory.com (Don’t place the trade in a pair, having the currency of High Impact News coming in less than an hour).
  • Keep open forexlive.com & switch on the notifications in google chrome to know any unexpected news immediately.
  • Mark the support & resistance levels in Daily & H4 timeframes.
  • Determine the market condition with HH-HL/LH-LL in Daily, H4 & H1 timeframes.
  • You may find the trade in one the following :
    • Trend Continuation
    • Trend Reversal (Trend Reversal in Range).
    • Breakout & Bounce/Retest

Trend Continuation Continuation Continuation

  • Price should be in between Support & Resistance Levels.
  • There must be at lease a complete cycle in the background (HH-HL for buying opportunity or LH-LL for selling opportunity).
  • Always trade once the pullback/retracement is completed on either one, two or all of the following & a candlestick signal is arrived.
    • Break & Bounce/Retest of minor support & resistance level.
    • Third/Fourth touch of Trend line.
    • Bounce/Retest of moving average (50 MA in normal trend or 20 MA in sharp aggressive trend).
  • Moving Averages alignment & Convergence in oscillators can be used as confirmation.
  • DO NOT BUY if resistance level is very much close.
  • DO NOT SELL if support level is very much close.

Trend Continuation Continuation Continuation

  • Price should be in between Support & Resistance Levels.
  • There must be at lease a complete cycle in the background (HH-HL for buying opportunity or LH-LL for selling opportunity).
  • Always trade once the pullback/retracement is completed on either one, two or all of the following & a candlestick signal is arrived.
    • Break & Bounce/Retest of minor support & resistance level.
    • Third/Fourth touch of Trend line.
    • Bounce/Retest of moving average (50 MA in normal trend or 20 MA in sharp aggressive trend).
  • Moving Averages alignment & Convergence in oscillators can be used as confirmation.
  • DO NOT BUY if resistance level is very much close.
  • DO NOT SELL if support level is very much close.

Trend Reversal Reversal Reversal

  • Price should be on strong Support or Resistance Levels.
  • There should be a valid candlestick pattern or Price Action pattern.
  • Bullish Reversal: Significant falling prices in the background in last 8 – 10 candles.
  • Bearish Reversal: Significant rising prices in the background in last 8 –10 candles.
  • Divergence on oscillators would enhance the probabilities.
  • Next strong support or resistance level should be further away to have a potential room from price to follow up the in the breakout direction.
  • STRICTLY use 1% or less risk per trade (add the spread in Stop Loss).

Trend Reversal Reversal Reversal

  • Price should be on strong Support or Resistance Levels.
  • There should be a valid candlestick pattern or Price Action pattern.
  • Bullish Reversal: Significant falling prices in the background in last 8 – 10 candles.
  • Bearish Reversal: Significant rising prices in the background in last 8 –10 candles.
  • Divergence on oscillators would enhance the probabilities.
  • Next strong support or resistance level should be further away to have a potential room from price to follow up the in the breakout direction.
  • STRICTLY use 1% or less risk per trade (add the spread in Stop Loss).

Break & Bounce/Retest Bounce/Retest Bounce/Retest

  • Price should break the a strong support or resistance level.
  • A Gap Candle at the break of horizontal level would enhance the probabilities.
  • Next strong support or resistance level should be further away to have a potential room from price to follow up the in the breakout direction.
  • A Candlestick pattern on bounce/Retest would enhance the probabilities.
  • Bounce/Retest on Trend line or Moving Average would enhance the probabilities.
  • STRICTLY use 1% or less risk per trade (add the spread in Stop Loss).

Break & Bounce/Retest Bounce/Retest Bounce/Retest

  • Price should break the a strong support or resistance level.
  • A Gap Candle at the break of horizontal level would enhance the probabilities.
  • Next strong support or resistance level should be further away to have a potential room from price to follow up the in the breakout direction.
  • A Candlestick pattern on bounce/Retest would enhance the probabilities.
  • Bounce/Retest on Trend line or Moving Average would enhance the probabilities.
  • STRICTLY use 1% or less risk per trade (add the spread in Stop Loss).

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