Limbo

Limbo

10-10-2022

14:34

Do you know why you keep on losing money even after applying technical analysis and fundamental analysis? The sole reason is poor "Risk Management". It is the most significant but least discussed topic in trading. It serves as the foundation of every successful trader. 🧵

What Is Risk? •Your exposure of losing some or all of your initial investment when trading or investing is known as risk. What Is Risk Management? •It consists of wide range of tools and techniques used in managing the risk.

In this thread we will go through all the steps needed for risk management. It is divided into two parts: 1) Trading system and testing 2) Portfolio management

1. Trading system and testing Decisions you need to make for a successful trading system: •Markets - What to buy/sell •Strategy - How to buy/sell •Position size - How much to buy/sell •Entries - When to buy/sell •Stop- When to exit •Take profit - When to book profits

Markets: are chosen by traders based on their trading strategies, available capital, geographic location, and trading hours. Stock market, Forex, Commodities & Crypto are just a few of the markets where traders/investors can transact.

Strategy: Trading strategy will differ based on the market being used. Secondly you need to decide your style based on your available 'time' for trading. 1. Position trading (Long term) 2. Swing trading: Medium term) 3. Day trading: Short term 4. Scalping: Very short term

The most effective trading strategies typically combine both technical analysis and fundamental analysis. FA provides analysis of an asset's underlying worth using micro- and macroeconomic variables. TA provides you entries, stops & TP's using price action and indicators.

Your trading strategy should be based on simple things. It should not be complicated. There are so many powerful strategies you can use, such as: •Trend following strategy •Moving average strategy •Breakout strategy •Pattern recognition strategy

These simple strategies can provide you trading entry, exit and take profit. For example: If we use a simple moving average strategy. Entry: Small MA crosses above the larger MA Exit(SL): Below the current low TP: Small MA crosses below the larger MA

Next step is execution. But before the execution you need to decide the position size for the particular trade. Position size: Determining how much money you will expose to a single trade/investment, assuming that you have "x" amount of capital. Position size ∝ Risk tolerance

Risk Depends on Size: You can wind up taking excessive risks or not enough risks for you to earn from a trade if your position size is either large or too small. We account for two types of risks here: •Capital/Portfolio/Account risk •Trade/Investment risk

A trader/investor must first assess his account risk before determining the proper position sizing for a given trade. Typically, most retail traders/investors risk no more than 2% of their whole capital per trade.

After that, the trader must decide where to put their stop-loss order/where to exit for that particular trade.

Note: •Trading includes risk. Finding your risk tolerance is crucial. •Your PnL should be calculated in advance. •Use proper Risk & Reward •SL is really significant. In the event that you suffer significant trading losses, it is challenging to regain your initial capital.

•Selecting a trading strategy doesn't have to be complicated. You are not required to remain with just one, either. •The important thing to keep in mind is that the best traders are flexible. They alter their trading approach in response to opportunities.

System Testing •It's crucial to backtest your trading strategy. •It's done by replaying trades that would have happened in the past under the conditions specified by a specific strategy using historical data. The outcome provides statistics to evaluate the strategy's efficacy.

There are two types of backtesting: •Manual backtesting •Automated backtesting Essential parameters to evaluate in backtesting: • Asset Name • Entry Date/Time • Entry Price • Stop-loss • TP Date/Time • TP Price • Risk-Reward

You can use @Tradingview to backtest a trading strategy. It provides both types of backtesting: •Manual method using bar replay •Automated method using pine editor and strategy tester

2) Portfolio management •Asset allocation •Diversification •Rebalancing It's imperative to learn how to manage your portfolio if you want to start making money in the crypto.

Asset allocation: It is the implementation of an investing strategy that seeks to balance risk with profit. By altering the percentage of each asset in a portfolio in accordance with the investor's risk tolerance, goals, and investment time period.

Diversification: Spreading your investments among many asset classes limits your exposure to any one asset type. Over time, this technique should assist in lowering the volatility of your portfolio. Diversification ensures that your eggs are not all poured into one basket.

Rebalancing: It is a crucial component of effective money management. Rebalancing your portfolio entails buying/selling positions when one asset class outperforms another by a significant margin. It enables us to monitor and uphold our financial targets and returns.

This concludes the Thread. I hope people find value in this. Would appreciate likes and share. Will be releasing similar threads in the future 🤝



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