Thread by @blknoiz06

Risk Management Thread

when you're trading, your main goal should be to find setups that have a high strike rate to succeed and a favorable risk:reward ratio

Entry: the price you enter the trade @

Stop Loss: your invalidation price, here is where you want to sell at a loss because your idea is wrong

Target: where you want to exit the trade and lock in profits

Risk / Reward: for example, if you are risking 5% on a position, but your target is a 10% gain, then your risk:reward ratio is 2R. R representing one unit of risk. If you were to always take trades that have a setup of 2R, then you only need to be right ~33% of the time to break

even.

i.e. you start with $1000, taking 2R trades risking 5% each trade

If you lose the first 3 trades for 5% each, and win the last 2 trades for 10% each

$1000 -> $950

$950 -> $902.5

$902.5 -> $857

$857 -> $942

$942 -> $1036

So even if you won ~40% of your trades you can be consistently profitable, which is the reason it's important to be patient with entries. If you can find setups where your invalidation is close to your entry, then your profitability increases by a lot

Traders have different rules for how they cap their risk but you typically should not be risking more than 5% per trade imo. If you're really strict with your entries you can usually get away with risking even less. This will also force you to be patient with waiting for setups.

When you're setting stop losses, always use stop market orders instead of stop limit orders. Stop market orders will immediately market sell at whichever price once your stop price is triggered but with stop limit orders theyll set a limit order after the price is triggered

so they will put a limit order on the books for you to exit. That limit order isnt always guaranteed to be filled so your downside can be much more than you originally planned if you use these instead of stop market orders

Account Management / Position Sizing

Once you determine the R/R for the trade and the risk on the individual position, then you can figure out how much of your account you want to enter the trade with. If you have a trade where your stop loss would be 15% away from your entry,

but it's still 2R because you're targeting a 30% gain, then you have the setup but won't be able to enter the trade with your full account. You would enter with 1/3rd of your account or smaller size because you don't want to risk more than 5% on that individual trade

Margin Trading

Traders use leverage when they think they have a really good opportunity with a tight invalidation. So if I have a setup on #Bitcoin  where my risk is only ~.5% on the position, then even if I lever up to 3x of my total account I'd only be risking 1.5% of my acct

Most inexperienced traders use leverage in the wrong places when it should primarily be used as a tool that works in tandem with your already established trading / risk management plan

Leverage can also be useful when you are managing multiple positions. So if you take a trade where the risk is 3% and your target is 10%, and you enter with 1x your account and the trade is going well, now if you see another opportunity with a similar R/R you are still able to

use leverage to take the trade while still being in the previous one that's already moving in your favor. You should always know your total outstanding account risk across all of the positions you have open