By: Hesham

Livewiretrading.main@gmail.com

Risk managment

Risk managment study:

A clear example of testing risk managment outcome on random

stratigies in real money.
 our culture and risk!
Our culture is built against taking risks, we all been tought to find safety and sustainable careers and
safe investments, we've been tought to avoid risk to survive, while risk is only way we can grow
and survive, our countries turned from leading growth and science, to followers due to less risk
seeking, but some of us stand out and proved why risk is essential for us to grow.

what is Risk ?
Risk is like an energy, it can shock you, it can burn you but without it you can‘t get anything
done, in trading if prices doesn‘t move then there won‘t be any benifits for trades, there won’t
be risk or reward.
On the other hand it‘s something we have to respect, cause it can end your trading career very
quickly and it‘s the reason why most of people fail in trading, not the trading strategy as
people think.

This is why we have to mange it, and this is where risk managment take place and below we are
going to explore risk managment and strategies to get you on a solid risk ground.

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Why risk managment?

Trading could be very profitable, or very destructible, we can expect to make a good sample of
successful trades following specific strategy but you can’t predict the next single trade outcome.

(The coin toss exercise)

Risk management gives us the power to have a control over the worst outcome to keep the odds on
our side as traders for a successful trading career.

Takecare of the risk and the rest will fall in place,

risk management is essential for protecting your emotional capital on the short and long term.

The more you become successful the more likely you will be humbled, that’s the journey of
successful traders, and one great example why you won’t be able to make money without risk
management is the analyst story from trading in the zone book by Mark Douglas. (it takes only one
trader to change the outcome of your trade).
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And today is all about how to make money by learning HOW TO LOSE MONEY!!

Trading is like breathing, you need to inhale and exhale, and you need to play your own rules in any
given game / trade in order to win, and I don’t mean winning by making profit, winning also is
when you lose within your plan, and this is what differentiate professionals and amatures.

Grab your coffee and let’s start!!

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In every area in life there is risk, and it differentiate from one area to another, so in order to be able
to manage risk you need to able to understand it’s nature, and below how to scale and understand
your risk management in trading:
-Identify the Risk. (Accident, loss, random unpredictable events….)
-Analyze the risk. (Money related, asset related, human physical…)
-Evaluate or Rank the Risk. (High risk, low risk)
-Monitor and review the risk. (Risk reduction process)

A- Capital:

living expense - attachment to the outcome

your capital should be emotionally free, if your trading capital is attached

to you or your family living expenses then your trades will be led by the
urgency, and there won't be much logic that put you on the right track!

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A- understand risk in leverage:

Information risk vs. Price risk – thinking in probabilities – understand your

product

information risk: is anticipating the trade for better price before you get a
full trading signal based upon your screen time and experience with the
markets, in here we risk knowing more information regarding the trade in
order to get a better price which maximize profits and reduce losses, and
this the type of risk the professionals prefer.

Price risk: is the opposite from information risk, in here we give away a
good price to know more information that confirms the direction of your
trade.

B- Understand your product

whether your product is a Stock, Commodity or Forex, you need to build a relation with the product
by screen time and observation, understanding the behavior of your product could be a great lead to
define your risk on every trade you take.

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A- defining risk as a fee

like any business you must define your risk, in other words you have to know your expenses (the
price you welling to pay) to know the next trade outcome.

and it's the only way to get your capital growing without fluctuating.

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Risk managment:
accept the risk – loss limit – position sizing

Accept the risk:

once you defined your risk you have to accept it logically and emotionally,
for example if your draw down on any trade causes you and hard feelings,
then you are trying to bite what you can't chew, and your focus on the up
side not the down side, and that is not sustainable on the long term even if
it pays short term, it could be worst if it works short term as it will build a
habit that could destroy your trading account.

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Loss limit:

loss limit is your trade / daily/ weekly / monthly limit that you can absorb
within your risk management, it requires discipline from traders to stick to
their loss limit and not getting into revenge trades and less patience on
opportunities.
 Position sizing:

why trading quantities is the main factor in risk management?

Let's take some trades examples.

Size = Risk in usd / the downside in cents*100

What is the right share size for a 100usd risk for a reward x4?

What is the right share size for a 50usd risk for a reward x4?

What is the right share size for a 35usd risk for a reward x4

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Notes:
 E) The art of scaling down losses:
trading draw downs usually come in a streak, due to market conditions, or losing your edge due to
trend or range behavior, so how to protect yourself from such drawdowns?
My worst streak was 8 days of losses in a row, a very good example and what made me a scaling
believer as I made all the losses on the following 2 days once markets back to normal according to
my strategy edge.

Once you defined your risk you need to make sure taking as much samples trades as possible before
throwing the towel on your day or week, in other words if I lose I’ll make sure to do my best not to
waste it on a single trade.

For example, I started my first trade with 40% of my risk for a trade opportunity, the trade failed
and I’m left with 60% of my risk, now it's time to scale down my risk to 30% on the next trade, the
trade failed and I’m left only with 30% of the total risk on the day, I’ll try to take another 2 trades
with 15% each, where I look for low risk high reward trades and in most cases makes your day back
if you are seeking A+ setups.

The same matter with your trading day loss limit, it should decrease from 20% to 10% in losing
streak case, and your scale goes to 0 then you need to take a step back and start analyzing your
strategy and your trading edge, or market conditions which is not suitable for all trading techniques.

Max consecutive losers Max Consecutive winners

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Drawdown on futures (risk scaling)

F) Leverage and Risk:

finding such opportunities with very low risk in cents, gives you leverage window which relate to
your risk plan where you can maximize your profits, and this is when leverage comes useful to your
trading, leverage is only useful if its risk is suitable for your limits.

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G) Risk managing profit range
Taking profits remains the biggest challenge for most of the developing
traders, and if you don't have a clear plan about how you will manage your
profits, you are more likely to give back to the markets more than you
make, here's some questions you need to answer to manage your profits:
1-Do you focus on consistency or growing your account?
2- what is your profit targets?
3- what if your trade started reversing halfway from your target while you
in profit?
4-what if you hit the profit target and your product keeps running beyond
that?
5-what's scaling system towards your profit targets?
6-do you focus on consistency or growing your account?
7-How much you welling to give back to the market on any given trade to
maintain a good trade risk / reward range?
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1- Do you focus on consistency or growing your account?

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2-what is your profit targets?
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3- what if your trade started reversing halfway from your target while
you in profit?
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4-what if you hit the profit target and your product keeps running
beyond that?
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5-what's your scaling system towards your profit targets?

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6- what if your trade started reversing halfway from your target while
you in profit?
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7- How much you willing to give back to the market on any given
trade to maintain a good trade risk / reward range?
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