Guest Post: David Belle about Risk Management

Risk management is key to trading. Without risk management, you can have the best strategy in the world, slowly grind down an account due to poor risk management.
There are several key principles that I follow with managing risk & managing a position while in a trade.
Firstly, I do not believe in cutting your winners short when your stop is managed with the correct risk parameters. If you take a quantitative based approach to the markets, where you look at your stats over a good sample size, you should have 100% faith in these stats as long as they are robust (have significance with little error/bias) and the conclusion is a positive expectancy. The second you begin to cut losers short, you are applying human impact to your robotic approach. How do you know that your trade would have hit your stop? By cutting it short you are affecting your stats and applying variance on certain parameters to your original data set. Leave the trade alone once you’ve entered it.
Secondly, your risk should be based upon market structure. Take a look here.
Based on how I look at the market, I would expect the market to not push past an upside rounded retest, since that is where further sellers are likely to be introduced (based on what has happened at the highs). This means I want to ensure than my 1% risk is adjusted to the market structure, and this means that I have to place my stop above where I believe the supply to be exhausted (above the rounded retest). A quick equation you can use to find pip value for 1% risk is (Account size/100)/stop size in pips = value per point. If you then know approximate workings for lot sizing, you can enter correct risk parameters quickly.
Managing your trade is also key. One thing I do is look for opportunities on the way down. This is how you grow an account. Look for the same entry parameters during your trade as those that you had for the original position. Tighten up your stops as you go, moving each ‘old’ stop to where your new entry stop is. This way you’re locking in all of your profits each time on each leg, with no way to lose money on the next new position (unless a broker goes tits up which isn’t your fault).
Something else to think about is to lower your risk when going through ‘bad’ periods. Trade 0.5% or even 0.25% risk and scale in when you are confident on your position (and following the same advice as in the previous paragraph). This not only allows you to stay in the game but also it doesn’t compromise any opportunities that you might have because of any ill confidence (you’re only trading 0.25% after all).
The majority of this advice is for swing trading/slightly longer term trading, however it can still be incorporated into short term trading as well. Price action is the same on all time frames after all… debatable…


David Belle

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