ICT Forex - Considerations In Risk Management

Considerations and Risk Management

In this section, the speaker discusses the importance of risk management in trading and how traders can manage risk to survive and have longevity in their trading.

The Dangers of Risking 10% of Equity

• Traders should avoid risking 10% of their equity as it can lead to significant losses.

• A string of eight losses with a 10% risk per trade could result in a drawdown of over 50%, which is emotionally and mentally damaging.

• Traders often deny technical indicators that suggest they are in a losing trade because they want to be right and feel good about winning.

• The desire to conquer the market can lead traders to take unnecessary risks, resulting in significant losses.

Mental Capital and Risk Management

• Traders have a mental capital that determines how much they are willing to risk, regardless of their account balance.

• It's important for traders to understand their mental capital when managing risk.

Lowering Risk by Reducing Position Size

• Traders who are uncomfortable with risking 10% can reduce their position size to lower their overall risk.

• By reducing position size, traders can still make profits while minimizing potential losses.

The Importance of Risk Management

In this section, the speaker emphasizes the importance of risk management in trading and shares his personal experience with over-leveraging.

The Consequences of Over-Leveraging

• Over-leveraging can lead to significant drawdowns, which can be demoralizing.

• It is important to control the amount of money you put up and control yourself.

• New traders often over-leverage and impose their will on the market, leading to losses.

The Risks of High Percentage Drawdowns

• A 5% risk per trade is too high and can lead to significant losses.

• Trader 1 risks 2% per trade and experiences an inevitable eight-string loss, resulting in a 13% drawdown.

• Trader 2 also starts with $10,000 but only risks 2% per trade. After eight straight losses, their account draws down by $538 or 5%.

Typical Traders' Mentality

In this section, the speaker discusses the typical mentality of traders when it comes to risk management.

Trader One's Equity Balance

• Trader One starts with an equity balance of $10,000 and risks 2% per trade.

• After eight straight losses, their account draws down by $1318 or 13%.

Trader Two's Equity Balance

• Trader Two also starts with $10,000 but only risks 2% per trade.

• After three losses, their account draws down by $346 or 3.46%.

Cutting Risk after Losses

In this section, the speaker explains how trader two was able to minimize their losses by cutting their risk after each loss.

Trader Two's Risk Management Strategy

• After the first loss, trader two immediately cuts their risk in half.

• When their account equity drops to $9,800, they reduce their risk to 1% per trade.

• After another loss, they further reduce their risk to 0.5% per trade.

• By managing their risk in this way, trader two is able to absorb losses without significant drawdowns.

Conclusion

In this section, the speaker concludes by emphasizing that trading involves some level of risk and that traders must be comfortable with losing money.

The Importance of Accepting Risk

• Traders must accept that they will lose money at times and be comfortable with it.

• If a trader cannot handle small losses, trading may not be for them.

Controlling Risk in Trading

The speaker emphasizes the importance of controlling risk in trading and advises traders to cut their risk if they experience losses. He warns against averaging down on trades and explains how controlling risk can help traders absorb losses.

Importance of Cutting Risk

• Traders should control their risk by cutting it if they experience losses.

• A 5% drawdown is tolerable for any trader, and traders should aim to control their risk to avoid losing more than this amount.

Averaging Down on Trades

• Traders should not average down on trades by increasing their exposure after experiencing a loss. This strategy is a loser's game that rarely works out over time.

• Although there may be times when averaging down works in a trader's favor, it is generally not a sustainable strategy and can lead to significant losses over time.

Absorbing Losses

• By controlling their risk, traders can absorb losses without suffering significant drawdowns in their accounts.

• Trader 2, for example, could have 24 losing trades and still have lost less than Trader 1 because he did not augment his risk exposure.

• Traders must take responsibility for controlling the amount of risk in their accounts since no one else will do it for them.

Controlling Risk in Trading

In this section, the speaker emphasizes the importance of controlling risk in trading and provides a strategy for managing losses.

The Importance of Controlling Risk

• Traders must be able to absorb losses and control risk to have a profitable career.

• No trader can claim to have never experienced a string of losses.

• The amount of money offered is what traders will take, so it's important to manage risk by reducing the amount offered.

Managing Losses

• When experiencing a loss, the first step is always to reduce risk.

• After a loss, traders should cut their risk and drop down to 1/2 of 1% until there is a turn in equity.

• If the next trade results in another loss, traders should only assume 1/2 of 1% risk on the following trade.

• Traders should only increase their risk exposure after making at least 50% of the drawdown from previous trades.

Conclusion

• Controlling risk is crucial for success in trading, and managing losses effectively is key to achieving this goal.