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

Key Point Summary

Summary Of Trading Psychology and Risk Management
 1. No one can predict what the market is going to be tomorrow
 2. All systems have drawdown
 3. You must be clear in your trading plan
 4. Focus on the task
 5. Plan for losses
 6. Be an independent thinker
 7. Plan the trade and trade the plan
 8. Manage your risk well
 9. Understand your psychology profile
10. Keep your risk small at all times
11. Trade less after series of losses
12. Know your exit