Day Trading Risk Management – Part 1

Introduction

as a day trader our main focus should be to stay alive in this game as long as possible and the only way we can stay alive is by having a proper risk management strategy now a lot of Traders when they get started or that are trading they focus on what strategies they should focus on how they should approach the market how they should chart and all these other great things and while these things are great they're not enough to keep you alive the only way you'll be able to stay alive and be able to put on more trades is by having capital and our job is to protect that Capital protected day in and out trade by trade and in order to do that we need to have a well-defined plan a well-defined risk management plan that helps us avoid taking too much risk and helps us avoid having too much exposure in trades and in this blog I want to talk about my risk management plan how you guys can build a risk management plan I'm going to talk about position sizing and I'm going to talk about R multiple now I'm talking about things that most Traders don't like that isn't amazing that isn't you know a shiny object but this is important guys so please stay through the whole blog take down notes pay attention to the important parts and understand that if you want to make it here you have to have a good risk management plan so let's talk about the first component of my risk management plan which is every trade I take I have an idea on how much I'm losing and where I am exiting so once again before I take a trade guys any single trade I know where the trade needs to go for me to be wrong and how much I will lose if I'm wrong

Understanding Risk Before Entering

now most Traders when they take a trade they go well if I buy this trade at $10 and it goes to 15 I will make $5 or I'll make $50 or I'll make $5,000 and Traders get in this Fantasy Land of what they will make now on a professional level if you want to be here in a long period of time you need to flip that you need to go well if I take this trade and let's just say for example purposes this is $10 and this is $12 and once again just something basic let's just go in like the basic of support resistance right and I'm like well I want to go long in this particular trade the first question ask okay well where does this trade need to go for me to be wrong right that's where I will be placing my stop so if I go long here this trade maybe needs to go to $9 just going to make it round number for argument sake that means if I am wrong and I buy a 10 I will lose $1 right now that is the first step I take before any trade of course I have a strategy of course I have setups I have a focus point on how I think the market will or should move whatever the case is but when I get there I have to protect my downside and protecting my downside allows me to look at should I take this trade does this trade make sense from a risk perspective if a trade doesn't make sense in terms of a risk perspective I won't take the trade right

Risk vs Reward

so to just go to another example would you risk $100 to make $1 now of course the the $1 is not guaranteed you have a 50% chance that you will make $1 or 50% chance you will make 100 you most likely will not risk the 100 to make the $1 because it just doesn't make sense but now what if I said would you risk $100 to make $1,000 and you maybe have a 55% chance of being right for argument sake right now you'll maybe take the trade so these two numbers have to make sense of like what you're risking and what your reward is so when I look at a trade my first component of okay if there's a setup great but the setup is not what makes me take the trade the setup is what kind of ignites me to look at the trade and be interested the risk component is what attracts me right so if I look at this trade from a risk component I will realize that okay I'm risking $1 okay and also it's not just random like I can't just say well I'm going to buy this a 10 and I'm going to risk you know $1 or $2 because that's what I want to risk on the trade no my stop loss where the trade has to go and if it goes them wrong has to make sense

Proving the Trade Wrong

so if I take the same example for argument sake let's just say this trade is now at $12 if it's at $12 and I'm like well I want to risk a dollar and let's just say the dollar is at 11 for argument sake I'm still risking $1 on this trade but if it goes to 11 that doesn't mean I'm wrong the trade could still be in play so that's what I'm saying by the trade needs to prove that you're wrong okay so just to go back to this example now when I am looking at this particular trade once again I'm risking a dollar I have to look at the second factor is does this trade have room to go up so for basic examples basic argument once again if I'm buying this at 10 and this does go to 12 I'm basically making $2 if I'm right and if I'm wrong I'm essentially risking $1 so in that trade my potential R is two to one I'm risking about a dollar to potentially make two so that's how I look at trades from a risk perspective whenever I take a trade

Determining How Much to Risk

now how much do I risk that is all contingent on my account size how much I risk will be different than how much you risk how much the guy next to you or the Girl Next to You risks will be different than everyone because that is contingent on your account size so if your account size is let's say a th000 I always say go off the one or two % Rule and also keep in mind this is if you're a beginner this is if you have not found profitability in your trading uh if that's the case risk 1 to 2% of your account size now if I risk 1% right of $1,000 at that point that is what my risk component should be so if I look at this particular trade let's just say 1% is $10 that means I'm allowed to risk $10 on this trade now in retrospect if I'm risking $10 $10 on this trade that doesn't mean I only put $10 into the trade that means because I'm risking $10 on this trade I can only buy a certain amount of shares or contracts or whatever the case is to only lose $10

Example of Position Sizing

I'll show you guys so if you're buying this at 10 you're buying this stock at 10 and your stop loss is at 9 that means you are risking $1 right now if you are risking $1 and I can only lose $10 per my account size the most I should be able to buy is 10 shares or 10 contracts and 10 contracts or 10 Shares are essentially going to be a $100 in cost so I'm paying $100 I'm risking $1 and I have 10 shares that means if I buy 10 shares here at 10 and those 10 shares go to N I will only lose $10 that is what I mean by position sizing that is what I mean by you need to look at your account size now obviously when you get to a more consistent level your risk will be altered there are trades for me personally that I increase my size increase my risk depending on the day setups depending on the market conditions right so my risk is not consistent day in and out week in and out it has gotten to a point where if I have a high quality setup I will be more aggressive on risk if I have been trading well and I have a strong bank roll meaning a strong amount of capital behind me of profits that I can actually risk in the markets and it makes sense I will be harder and I will double down on risk but that is also because I have been profitable for a very long period of time now if I go back to the beginning days I would keep my risk consistent until I find profitability and then I would look to alter size so you also have to understand what stage you are in

Working Capital vs Risk

okay another thing I want to talk about really quick is working capital right meaning Capital invested into a trade and risk right so I see a lot of Traders they will see that I've taken a position where I put $100,000 in and they're like well because he put $100,000 in he's risking 100,000 no guys just because someone invested 100,000 doesn't mean he or she's risking that and that's not what you should do because as Traders we need to have a stop or where this trade goes we will be wrong we need to factor in what that loss will be right so for example if I buy a trade that is at $10 once again same concept and I put my stop at nine if it goes to nine I lose a dollar right and let just say I can buy a 100 shares if I buy a 100 shares a 10 that's a 000 that's how much this trade is costing me this is how much capital is required for me to put into this trade $1,000 but because I bought a 100 shares or 100 contracts or whatever right and my stop is at 9 I'm risking $1 so $1 multiplied by my share amount which is 100 I'm only risking $100 I'm not risking a thousand if I don't hit my stop and this trade goes all the way down to zero so I just wanted to make that clear because a lot of people have a misconception about that

(Blog 2 continues from here …..)