Create Your Own Risk Management in Trading Instead of Copying
Trading is Gambling, are you a Casino Owner or a Casino Player?
Background:
Recently, I read an article about traders being desperate GAMBLERS and trading being the worst decision, and I got really disappointed. I never understood people who projected their failures to others.
I would like to remind my favorite speech below,
“Hey, don’t let somebody tell you YOU can’t do something, not even me, alright? You gotta dream, you gotta protect it. People can’t do something themselves, they wanna tell you YOU can’t do it. You want something, go get it PERIOD.”
By Will Smith, the Basketball Scene on the Building Roof, in the movie ‘The Pursuit of Happyness’.
While 90% of traders lose consistently, 9% make somewhat money, and 1% REALLY make money. Who says you cannot be in the 1%?
When you know what you are doing and you are in control, trading becomes adventure NOT frustration, and the world becomes a huge library.
To be a consistent winner, you need THREE components:
- A valid, tested, profitable trading system
- Your Own Risk Management
- Perfect Execution of Number 1 and 2.
I agree that trading is gambling since it depends on probability. But, if you have the components above, the probability starts to work in your favor.
In other words, you are the CASINO, and the rest are the CASINO players. Casinos do not win every single game, but they are always profitable at the end of every month.
When a casino player wins and a dealer loses, what percentage of assets did a casino lose? Almost nothing. Does the casino management get emotional when a casino player wins some games? No.
Objective:
The objective of this educational story is to help you develop your own Risk Management.
Every successful trader has their unique trading style and risk management. It is NOT that they have any secret in their risk management, but they have devised the one that goes well with their personality, trading style, pain tolerance, and life style (everyone is different).
Instead of being lazy and copying them, you need to figure yourself out and devise your own. Otherwise, you will rarely succeed. Even if you succeed, you will never be 100% INDEPENDENT nor enjoy the adventure of trading.
Creating Your Own Risk Management:
Now, it is time to figure yourself out and devise your own risk management.
The answers to the following questions will form the skeletons of your risk management:
- What is my annual goal of trading?
- What is my monthly goal to fulfill my annual goal?
- How many trades do I make monthly on average?
- How many PIPs do I earn per trade?
- What is my Profit/Loss Ratio per trade?
- What percentage of the time are my trades profitable?
- How many trades do I NEED to make monthly to reach my goals?
- What percentage of my account can I afford per trade? Affordable means to be HIGH enough that you can fulfill your annual goal and to be LOW enough that you don’t feel any emotional pain or discomfort when you lose.
Needless to say, Question 8 is most important.
In my case, I make 5 to 8 trades with 3:1 Profit/Loss Ratio monthly, and 2/3 of my trades are profitable. My monthly goal is to increase my account by 10% by earning 1000 PIPs. Mostly, my STOP LOSS orders covers 100 PIPs, and my TAKE PROFITs are at least 300 PIPs.
Given my stats, I risk 1% of my account per trade, which is barely enough to reach my goals. When I lose some trades, of course it sucks, but I NEVER feel the pain and derail from my trading system.
Every time I lose, I get closer to winning trades; I just need to survive until then. Given that my execution is perfect, my probability to go broke is 0.33333 to the 100th power.
To be honest, I have NEITHER met my annual nor monthly goal so far because I set my goals higher to push my focus and hold myself accountable month-to-month. If I reach at least 60% of my monthly goal, I feel OK (very happy at 80%). Otherwise, I will review everything from my trading system to the execution of each trade.
In some months, the market just does not move, and there is nothing I can do. Those are the months I excuse myself for not reaching my goals.
As long as my execution is perfect, I am fine because sooner or later players will come back to my casino.
