The Best Way To Risk

11 ago 2021

Let's consider two trading scenarios and learn how to use the R risk control system.

The risk control system is the most important component of any strategy. A trader who takes risks irresponsibly has no right to expect a positive outcome in his long-term trading journey.

The main principle of the approach is that the loss is always limited, but the profits are not. Considering in each trade, the stop loss is equal to 1R, in a profitable trade, one must get at least 2R.

Scenario 1 (see graph)
In the first scenario, a professional trader keeps track of the trades, controls risks and analyzes the results of the series.

Scenario 2 (see graph)
In the second scenario, the trader wants quick results, does not control position size, does not use stop orders, and trades on a whim.

Risk R

"R" - the amount of risk, a fixed amount in US dollars.
In each trade, the stop loss is located at such a level from the entry point that the loss upon reaching it will not exceed the specified dollar amount.

Example # 1
We have an entry point and a level where we want to place a stop loss
Let's say the volume of trading capital is $1000
In each trade, we risk no more than 3% ($30 - for those that might say its too much - GO GET A JOB) of the capital
Our R = $30
It follows that when the stop loss is reached, the loss will be no more than 1R ($30)

Take profit should be positioned so that the risk to reward ratio is at least 1 to 2(since anything beyond 63% win rate is hardly sustainable in a long run). Accordingly, having learned the value of stop loss 1R, you need to multiply the figures by 2 and place a take profit by measuring from the entry point. Thus, when the price reaches our take profit, we will receive + 3R ($90)

Example # 2
The risk per trade is $100 (1R = $100)
Losing trade -1R (- $100)
Profitable deal + 3R (+ $300)
You make 110 trades, of which 75 are unprofitable, 35 are profitable
1R ($100) multiplied by 75 losing trades = - $7,500
3R ($300) multiplied by 35 profitable trades = + $10,500
Subtract the total loss from profit $10,500- $7,500 = $3,000
Series total: + $3,000

Example # 3 (crypto)
You bought 100 coins at 11/COIN and placed a stop loss at $0.95 per coin
Your risk per trade R1 = ($5)
Take profit is set at 1.15 per coin
If you sell at the stop loss level, you will lose 1R = ($5)
If you sell at the take profit level, you will earn 3R = ($15)

Take all the "R" s in a given time, add them up and you have a pure "R" for your strategy. If the result is positive, then the strategy works, if negative, then you should think about replacing the strategy with a more effective one.