I would like to share some basic risk management strategies, which are universal for all trading styles . No matter if you are long term or intraday trader. No matter if you are trading All in All out (AiAo) strategies or if you trade advance position sizing techniques. There is plenty of trading styles in trading world, volatility trading , market making , liquidity providing, spreads , circles, multiple leg strategies, covered and uncovered positions . Few rules are universal for all of them.
Risk side limits
Most important rule is stop lose. (SL)
Yes, I know this is something what you have seen many times before, and most of you don’t even believe its that important thing. And I have to say, you are right. So small explanation:
I am not talking about stop lose order at every single trade. I am talking about time scale stop lose. Most of the guys in institutional trading do not use standard stop lose order at all. They are using just timescale stop lose. For example End of Day (EOD), End of Week (EOW), End of Month (EOM) stop lose. Why they use this type of risk levels is simple. They use different strategies with different amount of money.
Nice example you can find also in Dukascopy contest. The rule is that you are starting every single month with same amount of money 100k USD. For contest is good because everybody has same chance to be a rock star at one month. But if you see big picture that this rule is very important in long term trading.
One month you can make more than 100k USD. Sometimes much more than that. But you can’t lose more than 100k USD. This is perfect example of EOM stop lose. And now I will share picture of my performance.
I know that is nothing to be proud of, but anyway, you can see good example how strong this small rule is, even If I was many times on wrong side. In previous year of this contest I was on the top of the performance table. This year I am just somewhere on the top 20. Reason why is EOM stop lose, definitely not my trading skills
This rule can be much stronger as combination with another rule. For example, if you combine EOM with EOW or EOD then you can make very strong risk management set up of any strategy.
Even If you making lot of mistakes during the month, you need to notice that every single month you have just 100k USD. For better explanation we can make this setup for contest. I know that you can not win contest when you try making trades with risk management which have sense, but for explanation is good example.
So let say that we can set up our 3 limits for EOD , EOW and EOM together for contest period. If starting capital is 100k USD at beginning then everything that you can lose 100k USD in one month. And you will be able trade 4 weeks and 20 days in one month, and then you can lose 25k in one week or 5kUSD at one day.
EOM limit 100k USD
EOW limit 25k USD
EOD limit 5k USD
These risk sides limits can help protect your equity against huge unexpected drawdown’s as this one:
Profit side limits:
Trailing timescale stop lose:
Once again, trailing stop lose as order at one position is not very effective way how to trade. Reason? You can see just few days with strong trend but most of the time we taking orders in consolidation zones with chop, price is jumping up and down and nobody knows where will be another support and resistance in consolidation zone, we can predict just trend but not perfect trade with excellent timing, most of the positions we hold is + few pips – few pips at beginning of the trade.
What we can manage is timescale stop lose. Example:
Every day we are starting with flat balance of the day. If we set up stop lose of the day, than we can set up also target or trailing stop of the day. Target is not very effective way because if you catch good trend in good direction and as we all know, it’s not very smart to cut profit soon. For that reason is bit smarter set up trailing stop of the day. As you can see on the pictures.
So if you have a bad day, there is nothing to do, you can not move your EOD stoplose higher or lower , but If yours starting trades are in good direction, let them run. Do not close your trades, just get attention to controle P&L and move your EOD stoplose to higher levels. Nobody knows how strong is the trend at the beginning, but you can be very happy when you catch one of them. You can do that just few times at year and I am sure that setup like this can pay all of yours mistakes.
For some reasons most of the brokers do not allowed risk management tools and lot of people can be littlebit unhapy with tough way how to manage advance strategies with multiple legs (basket trading, more currency pairs with different volume of trades).
Dukascopy have one simple tool , which can control your P&L from all open positions. You can find it at your platform Portfolio – My account – Stop lose level
You can set up your stop lose level during the day anytime you want, and this setup will affect immediately.
Well, now we can be sure that our risk setup is clear, and our limits are safe. I would like to say that this few tools not going to be safe haven for all of us. But I can say that for traders is helpful. Bad traders will burn their accounts much slower and good traders will gain more profits faster.
Control your risk and let yours profit run. Good luck