Thread by @iWantCoinNews

#Educational || A thread 🧵

How to successfully grow the size of your trading portfolio using:

-A trading strategy
-Proper Risk management
-Self Management

1.1) A trading strategy

Any strategy is acceptable. Some use:
-Demand and Supply
-Pattern trading
-Harmonic trading
-Smart money concepts
-Elliott wave
-Indicators

However it needs to be somewhat successful.

1.2) How successful is partially depended on your risk management, but for this example we will use a 50% HIT-RATE. Meaning using this strategy we are right 50% of the time.

1.3) How do you know it´s x% successful? You back test the strategy at least a few hundred time on the timeframes you want to trade. There is a little more to defining a strategy, money/risk wise. Read further.

2.1) Proper Risk Management

As a trader with a portfolio 10k dollars, ask yourself each trade:
- How much am I willing to bet?
- How much risk am I willing to take?
- How much am I trying to gain?

(If you have a portfolio of 5k, divide the numbers from here on in half)

2.2) It does't matter if you have a smaller trading portfolio size. This is just an example. As we go on we will use some math, so adjust the math accordingly.

(I’m pretty sure some of you execute a trade without defining these answers based on the method you have back tested.)

2.3) A general rule is not to risk more than 1-2% of our portfolio each trade. If we define our betting size on 1k dollars that means you cannot lose more than 100$ (1%) per trade. To wipe your account you would need a losing streak of 100x.

2.4) This is not very probable. What is probable is a losing streak of 3. The chances of that happening is 12.5% with a 50% hit rate strategy. In practice that would mean a loss of 300$. Obviously we want to win back the 300$ and gain even more.

2.5) We should be good if we:
- have a strategy with a 50% HIT rate,
- risk only 1% of our entire portfolio,
- and have a Risk/Reward ratio of 1:2.

(This is just an example. You can define your own R/R ratio based on your strategy)

2.6) That means our trades have a potential risk of 100$ with a potential profit of 200$. So to win back the 300$ loss we need to have a winning streak of 2 with a 200$ profit. We established our betting size at 1k, that means we are looking for trades with 20% potential profit.

2.7) This is pretty optimistic, especially in a sideways market. Also we need to take into account our mental health, which I will mention later on.

2.8) To reduce our potential losses we reduce our risk to 0.5% of our entire portfolio. That means we are only risking 50$ per trade. Maintaining our +2 R/R ratio we can look for trades with a 10% potential profit. This is more realistic, but takes more time to win back our 300$.

2.9) To tackle the time issue we can increase our risk after we have some winning trades and regained our confidence. If you still find yourself in a losing streak, it’s time to take a breather. Got touch some grass. This happens and is absolutely normal.

3.1) Self-management

Our goal should be to remain in the game for as long as we can. A losing streak isn’t always what wipes out our portfolio. Actually it’s our winning streak that could have the same effect. How?

3.2) Without getting too biological you need to understand that winning releases specific hormones in your brain. This results in you feeling euphoric, which means you feel invincible.

3.3) The feeling of invincibility can lead to arrogance and that leads to putting aside your strategy and risk management.

3.4) To counter this a lot of discipline and humbleness is required. The other side of the coin is a losing streak, which leads to a loss of confidence. To counter this you need confidence in your strategy and risk management and discipline to execute it.

3.5) That’s why it’s very important to test any strategy you’re using. The more familiar you are, the more confident you are.

3.6) Discipline is very important. It requires you to do the same thing over and over again. Like a pattern. This results in a neurological pathway (in the brain) that grows stronger. Hence the paradox of discipline:

Once you have it, you don’t need it.

3.7) Trading can be exhausting for the mind and body. Limit your trading per day and limit the amount of trades open at a time. Make sure you eat, drink and work out. Have a social life next to your trading life. All of this will keep you sane. Being sane will win you the game.

Im curious about YOUR Risk management Strategy! Tell me about it.

Now show some love, like/retweet!

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