Risk management belongs to long-term traders who need to have capital management skills.
1. What is a risk plan.
Before trading, first check how much capital you have. How much risk are you willing to take on each trade? This needs to be planned in advance. The proportion of risk generally depends on your capital and your ability to make money outside the market. For example, if your invested capital is 500,000 and your off-market income is 100,000 per month, your monthly risk plan should not exceed 20,000, which is less than 20% of your off-market income and 4% of your total capital. This ensures that in case of particularly bad luck, with consecutive wrong trades, the loss in your account will not affect the future. For professional traders, the risk of each trade should be controlled within 2%, and the trading loss for the month should not exceed 10%. If it exceeds, force yourself to take a break and think carefully about that month’s operations.
There is also a psychological risk plan. Trading is a mechanical action, while humans are emotional beings. Therefore, I believe that the risk plan for psychological endurance is the most important. If you have 500,000 in the market and cannot accept a stop-loss of 20,000, you need to create a plan that suits your psychological endurance.
2. Profit and Loss Ratio
Trading is not a prediction nor a passionate goal; it is a probability of profit and loss. Each entry and exit of a trade, as well as stop-loss and take-profit, should have an appropriate plan; that is trading.
Here’s an example: A few days ago, I entered long on ETH based on a breakout at 2680, with a stop-loss at 2630 and a first profit target at 2750, giving a profit-loss ratio of 1:3. Here, I reduced my position near the second target of 2900, with a profit-loss ratio of 1:5. Use the funds you can afford with a stop-loss of 2650 for this plan.
3. Trends and Profit Target
Why are profit targets and trends part of risk management?
Trading is not a guaranteed win signal; strictly executing the profit-taking plan is the core of your stable profit.
Trends always emerge from smaller timeframes. Some people may ask why your trades can be so effective. Different cycles have different targets. Trades that emerge from small cycles into a larger trend involve gradually reducing positions and letting profits run. I can definitely hold on to those.
The profit-taking targets of 1:2 and 1:3 are both reduction positions. When the target is not visible, reduce the position according to the ratio; it’s just about earning slightly less. After all, market perceptions vary from person to person.
4. Subtraction in Trading
It's never wrong to withdraw some principal when you reach a certain profit in the market. There are many opportunities in the market, and being alive gives you hope for wealth.
This is the trading insight I have gained over many years of trading, and it is a necessary step in risk management. I hope it can help you all.
