Risk Management

Why Risk Management?
 - Capital Preservation and Capital Appreciation
 - Reduce stress from uncertainty
 - To ensure long term success
 - You can control

When Risk Is Managed Well
 - Clarity
 - Logic
 - Rational
 - Focus on the task
 - Execution

Do I Know...
 - My Win-Loss ratio?
 - My probability of winning?
 - How much I am risking per trade?
 - How much I am risking in total at one time?
 - What is the maximum risk my equity can take?
 - The importance of the size of my equity?
 - How many lots I can buy?
 - Where are my stops are?

Risk Management
 1. Money Management
 2. Trade Management

What Is Money Management
 - Consistent traders keep their risk very small
 - Equity is able to withstand a series of losses
 - Position sizing methodology

Many Ways to Size Position
 - Units-per-fixed-amount-of-money
 - Equal Units Method
 - Percent Risk Method
 - Percent Volatility Method
As described by Dr. Van K Tharp, author of "Trade Your Way To Financial Freedom"

Money Management Example
 - Total Equity = $10,000
 - Risk 2% per trade = $200
 - We want to buy CDL HTrust using CFD
 - Peak = $1.74 and Trough = $1.68 on 31-Dec-2009
 - No of shares to buy = $200/($1.75-$1.67) = 2500 shares
 - We round down to 2000 shares
 - Our potential risk = [($1.75-$1.67)*2000]+$50 = $210
 - % risk of equity = $210/$10,000 = 2.1%
 - Imagine we put up 5 trades with same amount of risk, ie. $210 per trade
 - We are risking a total of $210 x 5 = $1,050
 - % risk of equity in total = $1,050/$10,000 = 10.5%
 - If all trades are to stopped out, our remaining equity = $10,000 - $1,050 = $8,950

Key Points
 - Always round down the lot size to reduce risk
 - Size position based on available equity after taken losses
 - Only increase position size when profit allows
 - Once a position has locked-in profit, the risk is eliminated
 - Avoid topping up your account after series of losses

What Is Trade Management
 - Know when to enter and exit
 - How to set our stop loss
 - How to scale-in or add positions
 - When to take profit

What Are Working Against Us?
 - Broker commission and other fees
 - Lots size
 - Bid / Ask spread or Bid size
 - Size of trading capital

Use Of Leverage
 - Understand leverage can help and hurt your account
 - Don't use leverage unless you have accumulated enough profit
 - Apply leverage to EITHER total trading capital OR per stock basis
 - Be careful of using margin as leverage

What You Need...
 - You need to be consistent in 3 areas:
     1. Your approach
     2. Your trade execution
     3. Your risk management and psychological control