Risk Management In Trading

Risk Management In Trading

Introduction

Hi Friends, my name is Shan and as I said i would make a blog on risk management topic in how to start trading blog:https://www.shantraader.co.in/2022/10/How-to-start-trading.html and here it is and also here is the link for that blog to reach my website go to https://www.shantraader.co.in/

It's important for you to read this blog because many times people tend to be in over all negative pnl in spite of having trading well. Many people who inccur loss in trading try to recover them by taking extra risk, unknowingly but in this this process , they lose more you too might be one of them who is not able to make profit in spite of trading well because of, do you know what? It's because of technical error. There are certain formulas with regards to your position sizing. There are some terms called risk per trade and hit rate which you may be unaware of it so i have explained everything in step by step in detail so make sure read this until the end and also when you have time so you can note it down.

Risk Management

Risk Management is a underrated topic which is not discussed normally because maximum people don't apply it they think it's boring and their profits would drop which is not beneficial. So I am going share exact reason's, rules and logic behind it. You change the number a bit as per your finances. Is that okay so let's start and make sure to pay attention.

Before we understand risk management. We must understand a few things and those are RPT, R2R,Hit trade if we manage to understand these 3 things then risk management would be easy

R2R

You must understand the concept of R2R which means Risk to Reward many of them may know has it is a commonly used term in the trading. For example if we consider Sbi is currently trading near 450 price and you buy it and in this case you have kept your stoploss near 440 which is 10 points down than your buying price and you keep your target near 480 and if you incur loss what would it be it would be 10 rupees and you incur profit then it would be 30 rupees so your risk reward would be 1:3 because you are ready to take a risk of 10 rupees and also on that you going take profit 30 rupees so on 10 rupees you thrice time profit which is good but not in all case you should focus on 1:1 or 1:2 more but your stoploss is 10 rupees which 440 and you keep target of 455 which is 5 rupees it means your loss is more than profit and here risk to reward ratio is lower than 1:1 so never take such low trades where risk to reward ratio is lower than 1:1 and risk to reward ratio 1:1.5 is also okay. So we have discussed what is risk to reward ratio.

Hit Rate

If i keep my win rate not hit rate but win rate is 50% which means out 10 trades my 5 trades are profitable and 5 trades loss but yet i make profit i will calculate and show you. the calculation i have made for Hit rate would be clear to you in sometime. If it is complicated for you i am sorry . The hit rate calculation is after every 7-8 trades you may face a streak which means continuous loss of 3 trades it is not a rule but as a probability. When 3 losing trades occur and if i choose RPT is of 30% of the whole investment like 1 Lakh and loss i am ready to pay is 30,000 then you would be left penniless after 8 trades so you can't Risk Per Trade 30% and that's obvious. and now after every 16 trades you may face a streak of 4 losing trades but my opinion and now you Risk Per Trade 25% of investment of 10,000 and that is 2,500 ,loss per trade and then agin you will blow you account so 25% is also can't be kept as Risk Per Trade and one more calculation is after 32 trades you may face a streak of 5 losing trades and you have 20% Risk Per Trade of investment than again you have blown your account.so because of hit rate issues financial institutes have done these calculations.they bluntly say that you must not risk more than 1% of you account and in several book. It is okay is your account is more than 50 lakh then i would say it is good but people who trade with 10,000 , 20,000 , 25,00 and 1 or 2 lakh no problem you can risk 2.5% to 3% to 3.5 of account if your win rate is 60:40 means 6 trades profitable and 4 trades loss and not more than 3.5%.

RPT

RPT means Risk Per Trade. If I set Risk Per Trade meaning if i could decide to not lose Rs.500 for an investment of rs.10000 or lose Rs.5000 for an investment of rs.100000 or lose Rs.50000 for an investment of rs.1000000 it would be a great option but is that possible? Yes we can do it but many time people compromise with the stop loss so pay attention. Let's talk about Risk Per Trade.

As discussed above in hit rate that you Risk Per Trade should not be more than 3.5% of of account that's it.

First rule of risk management is if you have 1 lakh then you should not risk more than 3500 rupees per trade and second rule is you can't take more than 2 stop losses. If 2 stop losses are hit then day over or end the the trading for that day. So first rule not to risk more than 3.5% and second you take 2 trades and both of them stop loss is hit then close the trading or if you take 1 trade and stoploss hit take one more trade but in that also stoploss hit then stop trading for the day and don't stop in recovery you may lose 10% of the investment because of emotions , this is a trial it is not the end of the trade so don't over trade on the day of 2 stop loss hit. So because of hit rate you cannot raise more than this number it may be difficult but you have to follow this to become a successful trader

Now begins the real risk management So what do you what will manage your risk your stoploss? then how do you think swing trader manage with multi day stop losses so stop loss won't help but position sizing will which means Quantity and Quantity means how many shares to be bought and sold. If you follow this formula with discipline the your emotions would vanish like you will not find difficult to hold your winning trade or accepting the stoploss. The formula is quantity should be Rpt/Stoploss in rupees. For example you invest 10,000 and RPT is 3.5% which is 350 rupees and you took trade at Sbi at .450 and stop loss is 440 and target is 470 and stoploss is 10 rupees and target is 20 rupees so divide 350/10 is 35 so you cannot by more than 35 it can be even less than that but not more that. if you accept this then no one can stop you. In this case max you would lose is not more than 8% to 10% of account even in worst scenario so Quantity = RPT/Stop loss if you follow this then you are going to successful trader.

In trading add all this rules and formulas and see the progress

some knowledge able links:

7 steps to financial freedom: https://www.shantraader.co.in/2022/10/7-Steps-to-get-Financial-Freedom%20%20%20%20%20.html

self discipline in life: https://www.shantraader.co.in/2022/10/Self-Discipline-In-Life.html