The ABCs of risk management. How to calculate risk and stop-loss

Hello, Traders

Today we are going to explore risk management.
First of all, risk management is what keeps traders alive!

1. First of all - it’s very risky to get into a single trade with more than 20% of your trading deposit.
2. To begin with, you need to calculate the percentage of risk you plan for each trade. To simplify, it’s an amount of money you’re willing to lose if something goes wrong - and if the losses are equal to that amount, you get out of the trade automatically.

The stop-loss needs to be calculated with consideration of your tolerated risk.

Let’s say your trading deposit is 20000$.

The risk for one trade is 1% of your deposit, in our case it’s 200$.

If you make a trade for 10% of your deposit (20 000$), then the position size should be 2000$. The tolerated risk, in this case, is 200$ (10% of your trade amount). Therefore your stop loss for the trade should be 10%, after which the position will be closed.

If your position is equal to 20% of your deposit (20000$), then the position size should be 4000$. The loss you’re willing to tolerate here is 200$ (5% of 4000$). That’s your maximum stop-loss.

3. It's very important to understand that you have to make trades with a good risk/return ratio. The recommended minimum is 2 to 1, but 3 to 1 is better. You have to calculate that in order to remain profitable, otherwise, you can end up having losses executing lots of trades.

For example, if the R/R ratio is 1 to 2, and you succeed in 4 of 10 trades with an estimated 20% profits and close 6 of your positions with a stop-loss of 10%, you’ll have 4*20% (80% profit) minus 6*10% (60% loss) and that’s still 20% profit. So you get 20% profit even if only 40% of your trades are profitable.

Good luck and watch out for the market!