Risk Management 101

Updated: Jul 6, 2021

Risk Management is essential in being a trader. It allows us to always participate in the market and not get wiped out. If we are to simplify a trade, there are only 4 outcomes:

  1. A big win

  2. A small win

  3. A big loss

  4. A small loss

Your main job is to avoid c. A big loss

How do we do this? We must always know where the trade idea is invalidated. We must always ask “At what point am I wrong?”

It is always wise to risk 0.5-1% of your portfolio. New traders should be looking at only risking max 0.5% when starting out. But that does not mean you only enter only 0.5% worth of your portfolio on a trade. We can still have volume and have proper risk management

  1. Formula: (Total Trading Portfolio x % to risk) / (Trade Entry - Stop Loss) = # of shares to buy for your trade.

  2. This way, you always control how much you lose.

  3. Example: My trading portfolio is $20,000 and would like to risk 1% in a $Uniswap trade. It’s currently on an uptrend trading at $19 and I set my stop loss at $18 where if this were to happen, the market structure is no longer in an uptrend and it is invalidated. The formula is:

($20,000 x 1%) / ($19-$18) = 200 shares

200 shares x $19 = $3,800

If the stop loss were to hit, the value of these shares would be at $3,600

In this manner, we’ve managed to get some decent volume but only risking $200 or 1% of the portfolio.

Keep Learning!!!!

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