First of all, if you are an all-in player or an extremely lucky person, this article is not effective for you, because you are the chosen one, a warrior who creates miracles with passion. Risk management does not belong to you, but long-term traders need to have capital management skills.
Aunty Ai wrote this article because I recently found that many group friends trade based solely on passion, following my perceived direction, rolling positions at high points, and mercilessly cutting losses at low points.
1. What is a Risk Plan.
Before trading, take a look at how much capital you have. How much risk are you willing to take on each trade? This needs to be planned in advance. The proportion of risk generally depends on your capital and your ability to make money outside the market. For example, if your capital is 50,000 and your off-market income is 10,000 per month, your monthly risk plan should not exceed 2,000, which is less than 20% of your off-market income and 4% of your total capital. This ensures that in the case of particularly bad luck, where you continuously make wrong trades, the losses in your account do not affect future trading. For professional traders, each trade's risk should be controlled within 2%, and monthly trading losses should not exceed 10%. If it exceeds that, force yourself to take a break and think carefully about your operations for the month.
Aunty Ai also believes there is a psychological risk plan. Trading is a mechanical behavior, and humans are inherently emotional creatures. Therefore, I believe that the risk plan based on psychological tolerance is the most important. If you have 50,000 in the market, a stop loss of 2,000 is not something you can accept; you need to make a plan that suits your psychological tolerance.
2. Profit and Loss Ratio
Trading is not a prediction nor a passionate goal; it is a probability of profit and loss ratio. Each trade's entry and exit, stop loss, and take profit should have appropriate plans. Here’s an example:
Yesterday, I told my friends to enter the market and go long on BTC, based on a breakout at 25,700, with a stop loss at 25,400 and the first take profit target at 26,400, leading to a profit-loss ratio of 1:3. Here, we reduce positions near the second target at 28,000, where the profit-loss ratio is 1:5. Use the capital that can withstand the stop loss at 25,400 to make this plan.
3. Trend and Take Profit Targets
Why are take profit targets and trends part of risk management?
Trading is not about winning every signal; strictly executing the take profit plan is the core of stable profitability.
Trends always emerge from smaller time frames. Some people might ask why Aunty Ai can hold those positions so well; different cycles have different targets. Positions that emerge from smaller cycles to create larger trends are gradually reduced, allowing profits to run; I can definitely hold them.
The take profit targets, 1:2 and 1:3, are all about reducing positions. When you can't see the target, reduce positions according to the ratio; it just means earning a little less. After all, each person's understanding of the market is different.
4. The Subtraction of Trading
When you achieve a certain profit in the market, it is never wrong to withdraw some principal. There are many opportunities in the market, and as long as you are alive, there is hope for wealth.
Aunty Ai sincerely shares his trading insights; this kind of risk management is not found in books, and I hope it can help my friends.