Inexperienced traders think there is a magic approach to trading that correctly informs market behavior and allows for almost always profitable trades. Nothing could be further from the truth. Money is made by trading advantage, working with that advantage on a regular basis, and combining it with a consistent approach to how much of your money you risk on each trade.
Risk management is managing the size of your bet. The most radical definition we know was given by Ryan Jones: risk management is limited to how much of your account to risk on your next trade.
The risk/return ratio is a ratio used by many investors to compare expected investment returns to the risk tolerance boundary for those returns.
The main mistakes of money management:
– Trading a large percentage of the deposit (25% – 40% – 50%).
– Transferring of the whole sum, which was allocated for trading (inability to stop in time, exchange hacking).
– Desire to win back, excitement.
An important principle of money management is that the planned profit of a transaction must be greater than the anticipated risk.
Always try to enter a trade with a short stop and pull it at least 3 to 1. This is called RRR – Risk Reward Ratio and rewards are referred to as RRR 1:3. This is called a positive mathematical expectation!
A ratio used by many investors to compare expected investment returns to the risk tolerance boundary for those returns. This ratio is calculated mathematically by dividing the amount of profit expected by a trader after closing a position (i.e., the reward) by the amount the trader could lose if price moves in the opposite direction (i.e., the risk).
If you adhere to strict risk management, then even 30% of successful trades in total will bring a nibble, not a loss.
Suppose you have a risk/reward of $100 per position. The minimum profit from one position that you expect is 1:3. This means that in the case of a stop loss you will lose $100, in the case of take profit you will earn $300 (100$ of which your original money).
What result will you get if only 30% of your trades are profitable?
50% of accurate trades will show a result like this: