Part 1 - 'How not to lose your money' 💸
Please read and share. This might help a trader avoid losing it all.
A thread. 🧵
Fact: 90% of traders lose money.
We’ll learn how to be in the top 10% by mastering Risk Management in the upcoming threads. It’s the most crucial yet most overlooked concept.
In my opinion, ALL trading knowledge is useless without proper Risk Management. Period.
Since 90% of traders lose money due to lack of risk management, we don’t need to emphasize its importance any further.
⚠️ If we don't manage risk mathematically, we WILL lose all our capital. FOR SURE.
In this thread, let’s focus on:
‘Optimum Position Sizing’
📉 The 5% Rule:
Never risk more than 3-5% of your portfolio on a single trade. 💵
Personally, I prefer 3%; 5% is more aggressive.
This may sound counterintuitive, but let’s dig deeper. 🔍
Trading with only 5% of your capital doesn’t mean your trade size is only 5% of your total capital.
It means you’re risking 5% of your equity in a single trade.
No matter what happens, you will not lose more than 5% of your equity on any single trade.
Your Trade Size will depend on the leverage applied to that 5% equity. 📊
Here’s an illustration:
If you risk 5% of $100,000 (which is $5000), your position size can be $100,000. Leverage is the tool that allows this.
⚠️ Caution: This is just an illustration. We will discuss leverage later.
Leverage is determined by your Stop Loss, which is based on Technical Analysis.
I only use technical analysis to set the stop loss. Leverage is then adjusted accordingly. ⚖️
We’ll cover leverage application in the “Stop Loss” thread. 📝
❓ Why risk so little capital?
Mathematically, even with a high win rate (say 70%), you’ll eventually face 6 consecutive losing trades.
High-risk trades have historically been proven to wipe out capital.
Here’s the math: If you risk 40% of your capital per trade and lose 6 times in a row, you’re done. 🚨
Surprisingly, the most successful traders usually have a win rate of around 40%. 🤯
So, how do they profit despite low win rates?
The key is achieving a good Risk-to-Reward (R:R) ratio over time.
In the next threads, we’ll explore R:R, Stop Loss placements, and how to use leverage effectively.
Risk Management 101:
Never risk more than 3-5% of your equity on a single trade.
Position size matters, not leverage.
Your position size can be as big as needed, but the risk remains only 5% of your equity.
Leverage should always align with your stop loss. ⚖️
🔥 Remember: DON'T RISK MORE THAN 5% ON ONE TRADE.
This concludes Part 1 of Risk Management: Optimum Position Sizing.
It might seem boring, but it’s THE MOST IMPORTANT part of trading.
Read it multiple times. 🔄
The next part of Risk Management is coming soon. ⏳
Please share this thread to help a fellow trader. 🤝
Love,
Shadow. 🖤
