Some losing trade are normal part of the trading. My responsibility as trader is to Keep my losing trade small and let the winner run . Every trader has a potential to be loser ,if it is loser then i need to protect my self from loss.
Money Management
- Allow me to be wrong
- Help me control risk
- Take into account every trade can be potential loss
- Separate the pros from the novice
- Money Management is the state of the mind .
WARNING SIGNAL :- If your draw down on last 10 trades exceeds 12% ,then your are exposing your self to obscene risk . (Based on Risk of Ruin Table)
GOAL:- Let your winning trades run and cut your losing trade short !!!
Healthy Money Management Psychology begins when you believe that and acknowledge that each trade outcome is unknown at the time you enter the trader!.
Trade Risk Versus Market Risk
"Trade size" control the Trade risk .Can be controlled through protective and trailing stops.
"Account Size" control the Market Risk .Cannot be controlled ex. huge Gap up/down .
If you control your Trade Risk then there is high probability of recovering the Market Risk.
Risk of Ruin
The probability of an individual losing sufficient trading money to the point at which continuing on is no longer considered an option to recover losses. Make Risk of ruin work for you .
Win-Ratio Formula
Win Ratio =# of wins divided # of trades
Ex := 60%= 60 divided by 100
Pay off Ratio Formula
Pay off Ratio =Average winning trade divided Average Losing trade
Ex := 3= 300 Re divided 100 Re or (3:1)
Relations between Win-Ratio and Pay Off Ratio
Screen shot below show even if we get the 2:1 risk : reward and 50 % winning : Risk of ruin is reduced to 0.8%.Make Sure you make risk of ruin work for you than against it.
Two Percent Risk Formula
Account size × 2% = Risk amount
Ex:= 1,00,000 *2% =2000 -(These is the dollar amount you can afford to lose if you get stopped out.)
Trade size formula
[Risk amount − Commission]÷ Difference between entry and exit = Trade size
Ex:= [2000-500] ÷ (15*50)=2 (Maximum contract you can purchase)
Please find the link of some more articles on Risk Management
1.Nifty Future Risk Management Plan
2.Risk Management Checklist
3.Fine Tuning Your Money Management System
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