Updated: Jul 6
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:
A big win
A small win
A big loss
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
Formula: (Total Trading Portfolio x % to risk) / (Trade Entry - Stop Loss) = # of shares to buy for your trade.
This way, you always control how much you lose.
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.