Risk management helps with many psychological issues in tradingLet’s also talk about another so very important, and often undervalued part of risk management. Risk management really does help me to stay emotionally stable during trading. Just think about it: If I place a trade with a 30% risk and I lose it, it will hurt so much, and it will allow my negative sides, my revenge nature to come out and start dominating. I will be stressed, I will not sleep well if this trade will stay overnight. And even if I win, I will be emotionally and mentally tired, I will most likely not be able to continue trading in a normal state of my mind and emotion.
The next thing is not so obvious, but if you have bad and not consistent risk management, you will NOT TRUST YOURSELF. Can you imagine how destructive it is on a subconscious level, how much stress it causes? You start your trading day and deep inside you know you can do many bad things with your account because you know how often you just follow an impulsive behavior, and how often you revenge trade. You know it can be so bad you can actually blow your account in 1 day, as it happened before. Even if you made a self promise to trade according to your plan.
And on the contrary, what happens if I regularly, consistently risk 0.25-1% of an account. Many GOOD things will happen, both obvious and not so obvious. First of all, after entering a trade, I will most likely be able to stay relatively calm - I know if I lose, I’ll lose only 0.25-1%. I know I can trust myself and I will not move or remove my stop loss. I'm protected.
It will help me to be pleasantly curious about how my trade will develop. If it goes my way, I will be naturally glad it was good, but I will not fall into euphoria and become over-excited, because I risked only 1% and my gain will be 1-2% only. That's very nice of course, but not too much to bring me to a state of euphoria. If it goes against me, I will allow it to do so and hit my SL. And after it does so, I will then realize that it’s totally fine to lose a trade. I can lose even 10 of them in a row, and I will still have 90% of my account ready to trade the next day, next week, next month, and next year.
I believe good risk management lets you feel you DO control at least something in your trading, you will feel you can allow yourself to be mistaken about the trades you take. That's why I think we should not concentrate on the ways of eliminating overtrading, stress during trading, emotional trading, fear, and so on. Instead, we should focus on good risk management. I will post more about practical ways of improving risk management.
Risk!!!
How much to risk per trade? Returns and drawdowns.Between 1990 and June 2000 the median hedge fund (there are not that many that started in 1990) had an annual return of 16.3% and max drawdown of 28.5% according to MORGAN STANLEY. Keep in mind the 2/20 destroys profits. (16.3%*1.25)+2% = 22.4%, and 28.5-2 = 26.5%.
So what the median fund actually did I I did not mess it up was get 22.4% return a year and a max drawdown of 26.5%.
Of course that drawdown is the worst over a 10 year period.
The S&P 500 has an annual return of 17.2% and max drawdown of 15.4%.
What is interesting is to look at the details, for example the few specialist credit between 90 and 00.
The smallest return one had this to show: 11.5% annual, -4.9% max down.
The biggest return one had this to show: 17.4% annual, -19.4% max down.
More returns but with much more drawdown.
Here is the paper:
www.morganstanley.com
A portfolio of hedge funds, since they're not all completely correlated, would do much better than the S&P500 in particular on the drawdown side.
Renaissance says their medaillon fund uses an average of 12.5 leverage and takes 8000 trades at the same time 4000 short & 4000 long to reduce risk even more.
If this is true it means going in each position with 0,15% of their account. Not sure how far their stop is but has to be less than 10% of a share price, this means a risk of 0.015% per trade at most, now since there are 8000 at the same time it would be 8000 times more than this, but since there are shorts and longs it sorts of evens out and who know what their real risk is? All we know is it is very small that's for sure.
But leverage costs money, and what RenTec did was since their risk was so small and they do a ton of volume, they partnered with banks that offer them extremely cheap leverage.
And then they averaged 66% a year in the past 30 years, with a fund capped at 10 billion.
The secret is diversification, it reduces dramatically risk which allows for better returns.
But we have to come up with this diversification, not easy to find another good place to invest in, another good uncorrelated strategy.
And when we find those additional sources, we are not RenTec we have to pay a big price for leverage so we cannot just scale it hard.
Certain "strategies" will help reduce risk but they also cap returns much and leverage is not free so it might not be worth it depending on the person.
I just want to take a look at a few non-managed "low fee" "safe" no brain funds. Examples for the 10-year period ending January 31, 2017:
Vanguard LifeStrategy Growth Fund (MUTF:VASGX) has a Maximum Drawdown of 47.6% and annual return of 4.7%.
UBS Global Allocation Fund (MUTF:BPGLX) has a Maximum Drawdown of 48.7% and annual return of 2.6%. This fund has the rather unappetizing combination of low return and a large Maximum Drawdown.
LoL this is so bad. And all the grandpas are loving it, they think they found the holy grail and pat each other on the back. Add to this the fact that most people withdraw at the worse time...
Over the same 10 years period the S&P500, returned an annualized 7.024% dividends reinvested (4.8% otherwise) with a max drawdown of 57.8%
From 2000 to 2020 (september) it had annualized returns of 6.23%.
From 1871 to 2019 it returned about 9% (dividend reinvested) - 6.8% if we adjust for inflation, with a max drawdown of Adolf Hitler & Auschwitz the ultimate price.
So we're about in the average with 6%. Growth is slowing down (demographics, tech limits, earth limits...) so we will probably average less than 6% in the future.
From 2007 to 2017 the top strategic DIY portfolio recipes had returns of ~typically 11% with max drawdowns of also about 11%.
Ray Dalio pure alpha 2 has returned 11.5% / yr in the last 20 years and max drawdown I'm not sure I think it was 8% recently and much less before that.
Those numbers are hard to find seriously... But well we get an idea of how far it can get pushed.
An article from 2017: "Investors earned an average of 4.67% on mutual funds over the last 20 years (Source: www.creditdonkey.com)" of course there is no mention of drawdown because who cares am I right? Mutual funds are not for the best & brightest of investors.
Big risk is not a magic trick. "Big risk" does not mean "big return but with big risk". It means NO returns. It means losing with a winning strategy 😂.
If you'll flip an account, when you will blow it again?3. If you flip an account, like you want, how long would it take to blow it again?
Let’s imagine you have a small account like $2000-$3000. What do you want from it? Most likely, you would like to live from it, so depending of a country you live in you’ll need somewhat between $600 to $2000 a month for a decent living, right?
In this scenario, you’ll need to make 20-100% of your account per month. In order to make this much money, you will need to be either a super lucky and super professional trader with an astonishing winrate and good consistent risk reward. Most likely you are not. I am not if you ask me. So I don’t have astonishing WR and good RR. So what can I do to make this much of money, when my trades are not so good? Any ideas? Yes, I can risk more per trade and HOPE this trade will go in my direction and also HOPE that somehow I will stay calm seeing all this huge profits just grow and grow, and also HOPE I will be able to not close the trade when the pullback happens, and also HOPE I will stay calm and emotionally stable if the trade after having being in big profits will turn back and go to breakeven or a drawdown. Sounds familiar? So actually how mentally strong this person should be to bear all these emotionally? And how many times in a row the the person will be able to do it? Is it realistic to expect consistency from this style of trading in the long term?
But ok, let’s imagine, someone is able to produce 100% a month from his $2k account? Can you imagine how emotional this person will feel? He definitely knows that 5-10% a month is already a great, great result (if done consistently though), and he just made 100%. He will probably think he’s the king of the universe and he will probably try to make even more than 100% that next month. Really the only thing he does is taking a big, big run off the high high cliff and soon he will be dead, meaning he’s account will be blown.
This kind of thinking will help me to better understand the absurd of the desire to flip an account, at least for myself.
Importance of Risk Management - let's talk about it againIntroduction
We all hear from everywhere about risk management. They all say the same: “It’s important, it will help you to protect your capital, etc., etc.” But today I wanted to talk to myself about risk management in more detail. And I’m sure I will have a much better understanding of practical risk management in forex after this - I will talk through its psychological aspects, about RM role as the main principle of trading. I will do it in “talking to myself” format to remind myself in the first place about how important risk management it.
Don’t be fooled by the simplicity of risk management.
Unfortunately, risk management in FX is too simple. Dangerously simple I would say.
In its basic form, good risk management means risking 0.25%-1% of your account per one trade. That’s it. Just do that and most likely you will have an unbreakable account for at least several months.
Yes, of course, you can have a drawdown due to emotional trading or revenge trading or whatsoever. But because you will have good risk management, I will have so much time to stop trading emotionally, I can even take 10 revenge trade or 10 absolutely random stupid trades - and your capital will still be in place, even if you will lose every and each of these 20 trades.
I ask myself the question - how do people blow their accounts? Very often it happens in 1-5 days of bad, emotional trading, even if the whole months before was good. I’m talking from my experience though, and I don’t know - maybe everyone else is good as their risk management.
So why really it happens? In the first place because of bad risk management. Not because of the strategy, not because of the market acting randomly and not in my favor. Because I don’t want to have a simple yet powerful rule of risking 0.25-1% per trade. I start to complicate things and want to risk 5-20% at first, to gain some profits, and only THEN I want to implement good RM. Theoretically, it’s possible, yes, but in reality, I lose my mind and blow my account. So don’t be fooled by the simplicity of RM - because it’s not easy. Because it’s not easy to control yourself while facing a possibility of doubling your account in 1 day and to stay calm and even indifferent to it.
Always remember, Risk Management is the #1 rule, you can't control the market, but you can control your risk management. Stay calm and risk 1%.
Trading is a survival game. RM is the foundation of any strategy, risk management is the most important part of any strategy and step #1. Stay calm and risk 1%.
Jesse Livermore said: "If you cannot sleep because of your stock market position (you are weak), then you have gone too far. Reduce your positions to the sleeping level." Stay calm and risk 1%.
Daily Wisdom 32 - What a loser.It's not that you don't know how to profit. You simply don't know how to lose.
Liquidation Levels Trading FuturesI've seen lots of people getting liquidated on there longs on this BTC dump. This is why I think people never take into consideration risk management or don't know how it actually works. Maybe this can help a lot of people and help them clarify things. YES, the getting rich quick by leveraging is a probability, but if you ask me, I would consider it luck in the 25x to 100x than in lower leverage positions.
I think the getting rich quick scheme in crypto or FX is never talked enough and should always be addressed with proper risk management.
This analysis is considering you long your whole portfolio with leverage (which most people do).
If you want to long with high leverage, use 1% or 2% of your portfolio, try it out in Isolated mode first and see what it is all about. Your losses will teach you how to be a better trader, but never ever lose your ammo in your first try.
I'll do a follow up of this chart with potential gains by leveraging.
Daily Wisdom 09 - Are you aligned?After years of searching for the holy grail, the trader found himself.
LONG & SHORT POSITION TOOL📚An In-Depth Look at Using This ToolThis illustration explains the functionality of TradingView's Long/Short Position Tool and is intended to help new people looking for more information on this tool in a "novice friendly" format. TradingView’s position tool will aid you in pre-planning and pre-evaluating trades and as such should be an essential part of every trader's toolkit .
Note:
At its simplest, the position tool can quickly show you the R:R (Risk-To-Reward) of a single trade. By doing a little extra work, you’ll be able to then use this tool to properly plan for the risk of all trades you are taking compared to your total account size.
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Important terms:
Tick = A tick is a measure of the minimum upward or downward movement in price.
Trade outcome statistics = Used to track the outcome of a trade.
Example:
“Current XYZ position closed
+5.25% gain
10840 account balance after trade impact”
P&L = A representation of current Profit & Loss. Be careful where you position the tool, as the P&L is calculated based on the position of the tool.
Here are two uses for the Position Tool:
1. Only R:R = To quickly find only the R:R of a trade. This method does not bother changing account balance and such is only acceptable if you are tracking your current account balance and doing risk calculations off-platform in something such as a google spreadsheet.
2. Risk+R:R = To ensure your current trade idea meets both your R:R and max risk tolerance (risk amount; in our case, 1%). This is achieved by changing the “Account Size” option every time you are building a new position. This is the advised method to use, since like your trade journal, it’ll help keep you accurate and accountable.
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We will now explain the options contained within the tool’s input on-chart menu:
Account size = The current available balance within your account, the keyword here is available. If you are using the "Risk" option explained below then this needs to be updated upon starting to create a new trade setup.
Risk = Your max tolerable risk amount (either in absolute numbers or as a % of your account size). The default option is "absolute numbers," this uses the base currency of the on chart asset (If you were on ETHBTC, then the base currency would be BTC; for SPX500USD it is USD since this asset is displayed in its USD value). As you know, we suggest you stick to %.
Entry Price = The price you will be entering the position at.
PROFIT LEVEL:
Ticks = The tick difference from the entry price to the profit target.
Price = The take profit price.
STOP LEVEL:
Ticks = The tick difference from the entry price to the stop loss.
Price = The stop losses price.
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We will now explain all metrics being displayed on the tool while it is plotted on the chart:
Top info panel:
1. The difference in base currency (USD) from the entry price to the take profit price.
2. The difference in percentage change from the entry price to the take profit price.
3. The difference in ticks from the entry price to the take profit price.
4. The hypothetical account balance after the take profit target is achieved.
Middle info panel:
1. Simulated P&L from the entry price to where the current live price is.
(Displayed in the base currency of the on chart asset, USD in this example)
2. The quantity of the asset that should be purchased at the entry price.
This is calculated as follows: Qty = Risk / (Entry Price – Stop Price)
3. The risk to reward ratio, this is how much you could gain compared to how much you could lose.
The calculation is as follows:
Risk/Reward Ratio = ((Take profit price - Entry price) / (Entry price - Stop loss price))
Bottom info panel:
1. The base currency (USD) difference from the entry price to the stop-loss price.
2. The difference in percentage change from the entry to the stop-loss price.
3. The difference in ticks from the entry price to the stop-loss price.
4. The hypothetical account balance after the stop-loss is hit.
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Lastly, we will explain how Position Size and Account Balance are being calculated by TradingView:
Long Position Variant
Position Size:
Qty = RiskSize / (EntryPrice - StopPrice)
Account Balance when a position is closed after reaching the Take Profit level:
Amount = AccountSize + (ProfitLevel – EntryPrice) * Qty
Account Balance when position is closed after reaching the Stop Loss level:
Amount = AccountSize – (EntryPrice – StopLevel) * Qty
Short Position Variant
Position Size:
Qty = RiskSize / (StopPrice - EntryPrice)
Account Balance when a position is closed after reaching the Take Profit level:
Amount = AccountSize + (EntryPrice - ProfitLevel) * Qty
Account Balance when a position is closed after reaching the Stop Loss level:
Amount = AccountSize – (StopLevel – EntryPrice) * Qty
AccountSize:
Initial account size specified in the settings
RiskSize:
If the "Risk" option is set to "absolute numbers" = Risk
If the "Risk" option is set to "percentage of account size" = Risk / 100 * AccountSize
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Reference: www.tradingview.com
If we made any mistakes please let us know in the comments. There was a lot of formatting we needed to do to best display all of this information for you guys!
Enjoy. :)
Why chasing % should be your focus and not pips!Here we look at 3 traders, all claiming to have a winning trade with 100 pips - however, with very different % gains on their accounts.
The main part of trading is profitability, you can not pay your bills with pips.
This explains what you need to focus on and be aware of!
Hope it helps,
Regards
Darren
Trade Planning - How to Trade PlanThis video explains how to effectively trade plan to limit your risk and to maximize your gains. When it comes to Risk Management and Trade Planning, it's important to maintain a clear mind about the possibility of the asset your assessing going in either bullish or bearish direction.
Furthermore, this video explains some ideas on how and where to place stop losses based upon entry confirmations and provides insights about position managing your trades as they develop into a winner.
I hope you find this video informative and hope you use this video to your best advantage with your day-to-day trading activities.
Thanks for watching. Always remember to trade safe - trade well.
Regards,
Michael Harding
RISK DISCLAIMER
Information and opinions contained with this video are for educational purposes only and do not constitute trading recommendations. Trading Forex on margin carries a high level of risk and may not be suitable for all investors.
RISK TO REWARD 📚 An Educational Write-up on How to Find ThisIntroduction:
This illustration explains the minimum Risk-To-Reward ratio needed based on your average win-rate while using a fixed % risk amount.
"Risk-To-Reward ratio": The ratio of what you stand to lose compared to win.
"Fixed % Risk": A static % amount of your total account balance at risk per trade.
"Fixed Dollar Risk": A static $ amount at risk per trade. Regardless of account size fluctuations.
"Win-rate": The % out of all trades that are winners.
Steps:
1. Before being able to determine what Risk-To-Reward is acceptable to use, you will need to create a baseline measurement of your strategy's performance.
2. To create this baseline, you will need to backtest your strategy and obtain its current average win-rate.
3. This can be done using your pre-determined entry logic with a fixed stop-loss/take-profit offset amount.
(Adjusting your entry logic prior to finishing a round of backtesting may produce skewed results. Do not "cherry-pick" trades as that will lead to false results.)
4. Based on the resulting average win-rate you can then find the minimum Risk-To-Reward ratio you should be using.
5. Backtest again using the more optimal Risk-To-Reward ratio and repeat this step until the most optimal backtest results are obtained.
Here is the formula for determining your Average win-rate after you have tallied the wins/losses of your backtest:
#W = Number of winning trades
#L = Number of losing trades
(#W / (#W + #L)) * 100 = your average win rate %
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Introduction to Fixed Dollar Risk:
We have found it common for people to use the logic of fixed dollar risk amounts when calculating win-rates needed to break even, but then to use a fixed % risk in practice.
This simple-to-make mistake can lead to account erosion over time due to the way compounding works.
The fixed dollar approach uses relatively simple math for breaking even as shown below.
Example:
3 losing trades followed by 1 winning trade using 1:3 risk-to-reward achieves breakeven (ignoring trading fees and slippage)
This risk-to-reward ratio itself implies the win-rate needed (lose $100 three times, win $300 once, you break even).
The fixed dollar amount risk doesn't deal with compounding. As such, its logic cannot be used for fixed %.
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Using Fixed Percentage Risk:
Fixed % uses a more complicated and less apparent method for calculating how to break even. As shown in our illustration, if you take three losses in a row you won’t break even after your next win.
Fixed % is always dealing with the same % of your current balance. So as your balance decreases, the total dollar amount risked is less, and the total dollar amount gained with each win is reduced.
Thus, strings of losses require additional wins compared to the fixed dollar approach.
The fixed % method ensures against account erosion by showing the minimum win-rate needed to use each risk-to-reward ratio.
MATH NOTE: We used a simplified method for finding the minimum win-rate to make this useful and generally applicable. Our method is based on a given risk-to-reward ratio and assumes the max number of losses in a row to produce a minimum win-rate, it does not factor in all different possible loss strings and their probability.
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WHY USE FIXED % !?:
The question one will have at this point is, "Why to use fixed % if it is so F'ing complicated!?"
The answer to that is simple. Despite being more complicated, fixed % is actually objectively better by almost every other measure.
With fixed % you generally perform better than fixed dollar during strings of losses and wins. As with fixed %, you lose less as you go down (because you only ever lose 1% of your balance), and you gain more as you go up (because of your winnings compounding).
Not only that, but you also perform better even when losses and wins are more scattered, as you can see on the chart below.
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Conclusion:
Fixed % is more complicated than fixed dollar... to say the least.
However , it is none-the-less superior in most instances.
Use the logic above while using fixed % risk, since if you use fixed dollar logic but use fixed % in practice you will underperform your theoretical results.
If there are any major flaws in our logic/approach please let us know in the comments as of course, we are looking to provide as accurate instructional writeups as possible!
A brief introduction to RISK MANAGEMENT:If you like my ideas and the work I do, please check out the links in the signature and give me a like ;).
As I tend to get a lot of questions about this topic, most traders don’t seem to understand basic risk management in trading! From my experience capital protection and risk management are probably the most important part of any trader's skillset. So that is why I wanted to address this in a more elaborate educational Idea.
The kind of questions I get:
- I’ve got half my portfolio in this coin and the other in this do you think I need to sell.
- Do you think I need to sell my … and buy …
- I've been holding this since it was at that price do you think it will go down more ...
I know these don't necessarily seem like bad questions to most people, but that is not actually how you should be trading.
Note: In crypto trading lots of people (myself included) keep their portfolio in BTC or ETH. Now in doing this, you should not look at the dollar amount of the asset, but the goal should be to increase the amount of the asset you hold. If you are going to switch every five minutes because you think about the dollar amount of said asset, I would advise you to stay in dollar and trade from there.
Now with that little particularity out of the way, we can look at how trading should be done.
It is known most retail traders take positions with their entire capital and then when it drops they get scared and don’t want to sell because psychologically they can’t handle the risk. Now, this is the best way to blow up your entire portfolio in the shortest amount of time.
In trading, you can never be sure a trade will be a winner so you should always make sure you can handle a string of losers without it affecting the bottom line too much.
Example of how human psychology works in regards to this is a study done around the Kelly Criterion formula: ( This example is from the Wikipedia page of the Kelly Criterion )
Each participant in this study was given $25 and asked to bet on a coin that would land heads 60% of the time. Participants had 30 minutes to play, so could place about 300 bets, and the prizes were capped at $250. The behavior of the test subjects was far from optimal:
Remarkably, 28% of the participants went bust, and the average payout was just $91. Only 21% of the participants reached the maximum. 18 of the 61 participants bet everything on one toss, while two-thirds gambled on tails at some stage in the experiment.
Using the Kelly criterion and based on the odds in the experiment (ignoring the cap of $250 and the finite duration of the test), the right approach would be to bet 20% of one's bankroll on each toss of the coin. If losing, the size of the next bet gets cut; if winning, the stake increases. If the bettors had followed this rule (assuming that bets have infinite granularity and there are up to 300 coin tosses per game and that a player who reaches the cap would stop betting after that), an average of 94% of them would have reached the cap, and the average payout would be $237.36.
In this particular game, because of the cap, a strategy of betting only 12% of the pot on each toss would have even better results (a 95% probability of reaching the cap and an average payout of $242.03).
Now, this is why we do not want to trade like this. We should choose a risk level we are comfortable with per trade and keep this consistent. You can use the Kelly Criterion which can be difficult to do because it requires the win probability per trade for the calculation. Now you could get this by trading a certain trade setup you like to trade, let’s keep it simple, a 100 times.
By doing this, you could gage the probability of this setup being a winner and that would allow you to use the Kelly Criterion formula.
For beginners, a simpler way of doing this is the 1 percent rule. This means you risk 1% of your portfolio per trade. Simple example:
You have a risk-reward per trade of 1/1.5 and your strategy has a win rate of 50% of the time and you make 100 trades on a 10000 dollar portfolio. You would end up with a 25% gain after 100 trades even though the 50 losing trades lost you a total of 5000 dollars. Because of the risk-reward the winners got you 7500 dollars which brings you to 12500 dollars in the end.
This is a simple example but it shows the importance of both risk/reward and position size.
Of course in reality it would play out slightly different. You would recalculate after every trade if your portfolio decreases due to a loss, which means you reduce your positions to make sure your risk stays at 1% of your portfolio and if you win you increase your positions to do the same.
Another thing people get wrong with this rule is they start just betting the same position on each trade of let's say 5% and think they will get out when they lose 1%. This does not work!!!
You should look at your setup and where you want to place your stop and look at the percentage between your stop and your entry. If this is for example 20%, you take your 1% risk tolerance and divide it by 20, then multiply it by 100 and that will be your position size. If you are using leverage you will need to divide this position size by the amount of leverage used.
An example of risk-reward is shown above.
From my experience, some general rules I use which tend to improve your results on top of a risk management system as described above:
1. Cut your losers quickly and keep your winners.
2. Don't change your stop unless you take profit and move it above break even.
3. Always place your stop at a technical level and not a random percentage, for example, the last highest low.
Of course, you can adapt this to fit your trading strategy and style but the basics will be the same.
I hope this was helpful and if anything is unclear feel free to ask me a question through chat.
📝 Using Fixed Equity Percentage VS Dollar Amount?! 💣Today we are comparing fixed equity percentage vs. fixed dollar amount to show how fixed % has an edge.
The chart above should mostly be self-explanatory.
The only real note here is that while the difference can be slight in the short term, and while static dollar amount does have an advantage in some instances, over the long term the data suggests the % based method is the way to go.
Hope this helps some! :D
'Position Sizing' for beginners - XAUEURIn this example I'm gonna show you how important is the entry point.
With same levels for stop-loss and take profit, one position will give you the opportunity to earn 3 times more than the other.
It doesn't mather if the position is a loss or a win, I just want to visualy show you the importance of the entry.
WHY CAN´T I BE PROFITABLE??!!Every trader has got himself into a loosing trade. This is simply the part of this game. You will never be able to predict every move correctly. The biggest thing that separates a profitable trader from an unprofitable trader is actually not better technical analysis or more experience. The biggest factors in my opinion are trade management and risk management. These two components will have immense effect on your profitability. With good risk management you can be profitable even if you are right on less than 50% of your trades. Good risk management means you know where you should get into a trade so you can set a stop loss (which upon hitting it should invalidate your entry) relatively close to your entry. This makes your losing trades much smaller than your winning ones. And the result of this ratio will be seen in your profitability through time.
On the picture above you can see how one of my last trades went. I got in on the close of the candle marked with a green arrow. The trade then quickly went against me. But with my risk management i minimized the loss by closing the position when it closed below the red support line. I also put a stop(white support line) at a level that would upon breaking very likely invalidate my my long entry. Even though i took a loss i do not regret taking that trade since taking losses here and there is a part of my strategy and it can not be otherwise.
Yesterday i also posted about another trade i was playing on the s&p 500. That trade turned out perfect. And with 50% winning rate for that day i made some really nice profit simply thanks to my risk management.
Here you can check out how it went
You can also go check out my posts from yesterday on why i was taking those trades.
The Best Yield Curve Tutorial You've Ever ReadThe two year has remained relatively flat since this week's open. However it did gap up significantly. Why is the 30 year falling (see linked article) while the two year remains consistent?
Bonds of different maturities care about different things. In particular, the shorter end of the spectrum cares less about the long term effects of inflation and the general position in the economic cycle than the long end. Why? Those effects will be felt less in two years than the short term effects of interest rate decisions or the sentiment about it.
Conversely, the 30 year has more time to price in these factors. It has to take in the considerations above, and more. Hence why the 30 year is tumbling right now, as it's more sensitive to risk sentiment and longer term factors.
Don't forget that bonds are fixed income products, meaning they pay a yield that is inversely proportional to the price. The difference between the yield at either end of the spectrum is commonly referred to as the yield curve . The yield curve could also refer to a plot of the set of all yields on treasury products of various maturities.
The difference between the two ends could narrow, or flatten . It could also steepen . Furthermore, that flattening or steepening could be driven by either end. In this case it is led by the long end. Since prices are decreasing (on account of risk on sentiment), we call this a long end led bear steepener .
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The Secrets to Forex & Seasons GreedingsThis section is on seasonality and follows the prior section on carry trading conditions. I strongly recommend reading the prior parts for full value. This is (pt. 5) in chronological order.
And yes, this will be on the test.
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You probably have someone in the immediate or extended family that considers herself (let's be honest) an expert shopper. The coupons, the early trips, the economy size containers, the 2 for 1 dealerinos, etc. Gets the seasonal produce or vegetables because they're cheap. Skips Black Friday, shops Cyber Monday. Didn't run out of toilet paper during the pandemic, etc. Gets all the Christmas gifts shortly after Thanksgiving, or in early December. And this expert shopper will repeat many of these decisions each year around similar times or with similar products. Doesn't matter what holiday, culture, or country involved, the behavior is parallel. I'll cut the music and get to the important stuff: Shopping is where the average normie experiences the pricing influences of seasonality.
Not everything is 'worth' the same price all year round, not everything can be produced on any given day of the year, and not everything is consumed on any given day of the year. There are private and public laws and behavioral standards tied in as well. Everyone knows this as they experience it in their general robotic lives. But retail traders tend to forget this when it comes to trading and investing.
So what's the difference between seasonality and similar-sounding concepts like cyclical trading or using historical models?
Part 1: Solar Calendars
Seasonality is a kind of factor (like in factor investing), it's a more rigid concept derived from historical data. It tends to be cyclical, but the timing is not arbitrary, it's formatted into the gregorian calendar . This calendar is based on solar timings and their effects. Solar timings were once one of the great wisdoms coveted by our ancient ancestors, building incredible structures to predict these seasonal events. They didn't do this for fun. In our current era of surplus, we can tik tok our way to prosperity, but in earlier eras, maximizing food and shelter was a life or death strategy.
The solar calendar predicts these events with relatively decent scientific accuracy. It offers certain outcomes. Think about trading and its challenges. Uncertainty is the norm, so anything certain is inherently valuable. Now, how does that fit into currency exchange?
Businesses, major exchanges, and governments all rely on this calendar for their standard operating procedures and for risk management. What do those three things have in common? They involve people, and they involve lots and lots of money. They all share the same green destiny.
Part 2: Are These Titles Useful?
I said this a million different ways in the first 2 parts. Look, there are certain psychological biases that greedy people at the top share, due to their upbringing, income bracket, and nationality, among things. Those biases help make seasonality matter, largely due to vacation timing, consumption season, and tax events these wealthy people will into relevance out of thin air, like a magician. This is why seasonality can still generate an edge for you, the pitiful retail trader. Now, as mentioned in pt. 3, we are still focused on long-term trades, traders that hold for many days, weeks, or months.
Does seasonality have big changes for intra-day traders (who play on nightmare difficulty)? I'm not going to write a book here and detail every answer, you need to do your own research. Or you can just wait for me to write the section on intra-day trading. Or you could spend your whole life serving coffee.
Please remember to follow me so I don't have to see your awful latte art.
Part 3: Dead Presidents
Okay, here are some secrets from the money magicians:
There are seasons for all securities.
It's important to understand that seasons for stocks and commodities affect currencies.
I had to check google to make sure this is up to date but it appears you still need cash to buy or own things. And we're in the cash game. Ever wonder why dead presidents or national heros are always on the faces of fiat currency? As described in the last part, they are country-level assets, created for tax and liquidity purposes. Those faces are reminders of your most sacred civic duty: paying taxes. Did you know that all people have to pay taxes? Including wealthy people? The most powerful person on earth (probably) pays taxes. And, based on nationality, have to pay taxes at the same time each year? That is a rare form of certainty related to markets.
Part 4: The Spice Must Flow
Tax season, especially the US tax season, is big because lots of cash (usually over 80%) flows through forex as USD. Most of the wealthiest people in the world hold a lot of USD. And a majority of them live in the US, as tax residents or as citizens. As a result, it has an effect on USD rates towards the end of the year, when investment portfolios are rebalanced to try and take advantage of the tax system with whatever strategy is legally available. Indeed, it can be complicated, and I recommend doing your own research, something you will have to be competent at if you want to make a living for decades into the future. The net assessment is that if you are trading towards the end of the year, you need to be mindful of how the US tax season will affect your potential positions, and fit that into your risk management evaluation.
Variables like earnings seasons, and other business or industry dependent factors serve as strong influences. After all, they are the ones using most of the money... currency isn't just there to collect for rent and spend on groceries, it's to create and capture value, the mission of all corpos. The money must flow.
JUST THE TIP: When looking at seasonality, or any other global macro like news or fundamentals, it's important to think in terms of DEMAND. Does xyz increase demand for a currency (relative to the pair)? The supply does matter, but where many retail traders (and especially cryptocoinies) tend to get pink in the face, is when they focus almost entirely on supply in the evaluation of a currency. Demand is principally important to currency, and is the primary reason why consensual pegging agreements and the gold standard failed last century. Instead of reading a book on it, just read this: the demand for the currency of a few key nations is consistently strong due to loosening international finance standards that allow the newly minted wealth of developing world investors to gravitate towards developed country assets to hedge against local economic turbulence. Oh yeah and the petrodollar.
Part 5: Commodifying Seasons
Looking at commodities as futures contracts, because they deserve special attention. Especially useful in recent months.
A lot of bag holders suffered big time in the oil contract bogmarket. The Bogdanoff's made a call, and prices on a few different oil contracts fell below zero. The behavior is so significant it is having effects on USD and global economic sentiment. Thank god we smart kids trade forex right? No zeros in forex, just infinities.
There are plenty of articles online explaining how that happened, but let me tie in FNDs and explain the intersect with currency. The First Notice Day on futures products usually represents the peak of a trend if a trend was recently present. For example, the trend would occur over the prior 2 weeks or more to the FND date. You would want to look for positive open interest changes to support that trend. The FND could represent a definitive exhaustion point and signal a reversal or retracement. For risk management, these can be useful to look at if you trade a safe haven currency against a commodity or emerging currency. That means JPY & CHF (and now USD & EUR) against AUD, CAD, and sometimes NZD. Overall, most non-safe havens will have commodity performance attached to their currency performance. A quantitative or qualitative (ya eyeball it) composite of the performance of these commodities can help identify your center of price gravity (and its shift, is it being pulled up or down). I will come back to commodity futures and how they affect commodity currencies in the next part, so don't panic. In sum, I suggest googling the first notice days for commodity contracts (and you should also make note of currency contracts as well), taking a look at their chart development, and being mindful of a likely reversal occurring on those dates. This is an excellent way of finding extremes on the related pairs and can serve as 'risk mindful' price levels for entering into a long term trade.
For example, not to get too far ahead of my risk management articles here, but let me briefly spoil with a more intermediate level trade: Relevant commodity futures contracts are rising in confluence with seasonal data and your currency (AUD/JPY) is rising in tandem. Your center of price gravity is accurately reflected as the current price of AUD/JPY at market, and you bought at the start of the month based on prior research, so you are in profit. Shortly before FND, interest rates on AUD are cut and the AUD/JPY trend flatlines. However, at the FND, the contracts make an extreme bullish move, and price action on AUD/JPY jumps as well (but in a smaller %). You have found an extreme, and can now close your long position or open a reversal position and wait for PA to retrace.
Now, I could write a Chinese novel on all the specific things that should also happen with that trade, but that example is a framework you should familiarize yourself with.
Part 6: That Time of the Month
Your eyes are probably glazing over at this point. That's alright, everyone has a limit to what they can read and learn. Just like everyone has a limit to their net worth. Wonder if there is a relationship between the two.
Let me make this a little easier by explaining just how complicated seasonality can be.
As mentioned earlier, seasonality tends to work simply because there is an underlying calendar structure within highly regulated wealthy markets. These structures are created by the rules and standard practices of individuals and institutions, and more. These are effectively factors (factor investing) that shape price mechanics. Money moves in and out based on these regulations or standards (controlled timing), IE: tax obligations (end of year), holiday spending (consumer nations benefit), commodity contracts (exchange rules), and vacation months (volatility dynamics), and more. Global weather patterns influence shipping and availability of ports, temperatures and Ninos influence the price of agribusiness commodities normally tied to season... But it doesn't have to be that complicated for you, my small headed friend. I wanted to highlight the harder route first if you so choose to follow it, but the easy route is also available.
Most of the forex market is USD, the remaining minority is EUR and JPY, and the rest is just a twinkle in some greedy fatcats eye. Why not just look at the seasonal or monthly performance of those currencies? Review the conditions from the peak, instead of the ground floor?
Part 7: Started at the Top
Firstly, if you prefer averages, you can average past 3 years, past 5 years, past 25 years, etc. You can find these indicators on TV by searching 'seasonality.' You can find them as free or paid indicators on the mt4 marketplace. You can also find them in various forms on other sites, some of them premium. Now, it gets even easier. Some pairs tend to close higher on some months versus others, this can be a useful unit of analysis when you attempt to fit seasonality into any overall model. If a pair like the USDJPY has 65% of closing higher in October but a sub 35% of closing higher in August, then you can evaluate risk by aligning yourself with history. You will know based on the MoM shift of probabilities. If you don't know this, then you need to return to the zoo, they are probably looking for you. Likewise, anything between 45-55% is likely noise, and not subject to the psychological intersect present in seasonality that I find significant. Again, we're still operating under a long-term trade frame of reference; intra-day traders will have their own sections in the future. To stay on target, long term traders with limited time to do additional research will want to focus on monthly seasonality performance at minimum.
You don't necessarily need to be going through futures contracts, seasonal consumer spending, tax season dynamics, or weather patterns for perfect market timing opportunities; but know that the institutions do, and they have the money, they make the markets, and they intimately follow (or create) business and client trends. As I explained in part 1, what they think is the only thing that matters, even if it seems overly complicated or stupidly simple. Spending a little less time with your gann wave analysis and more time mimicking their research efforts will improve your survivability and your probability of accurately finding that center of price gravity.
What about carry conditions?
So let's return to the carry condition question. How can you use seasonality to find the center of price gravity, the resilient value, for long term positions? Alone, it is not sufficient, but it necessary to consider, especially in months where seasonality dictates a 65% or higher chance of a positive or negative month. For instance, you decide to plan a 3-month trade on the USDJPY, from August through October. You will know based on seasonal monthly performance, that the center of price gravity is moving from a lower to a higher price point. UJ has a 32% of closing HIGHER than it opened in August, a coinflip 53% in September, and 68% of closing higher than it opened in October. This instructs your risk management approach. You take additional risk holding a 3 month short in that period. And adding carry conditions, you pay a daily fee to make that trade as well. Personally, I feel sick just thinking about that trade. I had coronavirus last month, but that trade is worse. Now, that doesn't give you much guidance on when to open your position, which further sections will help elucidate.
If you got this far, congratulations. Your mom and I are very impressed.
More on fundamentals, commodities, and global macro in general next time. If you're someone that obsesses over the medieval metals or boomer rocks, then you will really enjoy the next section. Still lost and confused? Don't worry, it's already priced in.
Risk ManagementAs I promised, I publish the post about risk management.
There are different types of risk management, but I will share one of the best in my opinion.
When you trade futures you have no control over what is happening in the market, the only thing you can counteract is your stop orders and it depends on the volume of your position.
Nothing more depends on you. You can try to control the market with your thoughts, meditations, prayers, you can try anything, but it doesn't work and it's not surprising :)
What is under your control is stop loss. Don't overdo with your trades - it's when you trade too big contracts or when you trade too often.
Here too, there is the considerable cause that pushes you to trade too often: you look at small timeframes and afraid to miss a profitable trade.
Your problem is likely to be that you have a large number of open positions, so I will tell you how big your position should be.
One simple mathematical method will help you.
You have to determine the amount you are willing to risk.
Say your trading account is $100,000. And you need to decide what part of that amount you want to risk on one deal. Someone might say I'm a very risky guy, I'll risk 20%, the other - 15%, and the other only 2-5%.
The more percentage of your deposit you use in a deal, the better chance of zeroing out your deposit.
You have to determine your risk factor.
Usually, in an aggressive strategy, the risk is 10-12%.
You always need to understand what percentage of your money you are willing to risk. If you know exactly what your maximum possible loss and use the appropriate stops, then you can't lose more than you have specified. Of course, you need to take into account some possible slippage.
Let's assume that you set for yourself a maximum loss of $500 on a trade and don't risk more than 10% of your capital. Then the risk factor of my $100K trading account is $10K.
So you only risk $500 per trade and be able to make 20 failed trades straight.
After 3 unsuccessful trades, as a rule, I close the terminal and go out for a walk or drive a car, after an hour I return and make no more than 2 trades
Formula:
Your balance multiplied by risk percentage(e.g. 10%) and divided by your maximum possible loss (stop, e.g. $500) and as a result we get the number of contracts that you can trade.
100,000$ * 10% =10000$
10000$ / 500$ = 20 Number of traded contracts
You can see the formula on the chart
It's all about money management, once you earn more money you can open more positions, and when you get a loss the contract volume decreases too.
Fact of life, if you bet big you are guaranteed to lose big.
Money management must begin before you enter the trade. You should know how many trades you can trade and how much you can risk for each of them.
Never invest more than 20% of your capital if you are experienced, and 10% if you are new with trading.
Don't trade more than six markets at a time.
When you feel sure that you can't lose, it's time for the biggest risk of losing everything.
Fear allows you to be careful.
You must risk no more than 5% of your capital per trade, regardless of your experience.
Remember, the markets aren't sweet candy, they're brutal, and many people, without realizing it, lose their deposits.
The market is a puzzle without instructions.
I hope I a little bit helped to put your puzzle together.
Respect the market he is your teacher
With respect, EXCAVO.
Bankroll and Risk Management, Risk to Reward Ratio - EDUCATIONALIn this example I am showing you how important is RIsk Management in your trading system.
You could be the most talented trader in the world with a natural eye for investment opportunities, and still blow your account with one bad call without proper risk management. No matter how good you are, or how experienced you are, you’re still going to incur losses. Even the best traders in the world suffer losing trades - it’s part and parcel of trading. That’s why risk management is so important to your trading.
One way that you could strike the right balance between reward and risk is to stick to a reward:risk ratio such as 2:1 or even 3:1, where your targeted profits are always double that of your maximum losses. So even if you suffer three losing trades, you’ll only need two profitable ones to ensure your total profits outnumber your losses if you stick to this reward:risk ratio. Although it’s not a general rule to follow, it can help you to visualise a specific approach to risk management.
"It's not important whether you are right or wrong. It's about how much money you make."
That means that you can still win 4/6 trade and you are still loosing money.
In the example showed you can see that investing different amount of money in each trade can drive to a negative ROI even if yours winning rate is over 66% .
