Risk management is one of the key points when you trade in any market
I have to mature the risk management mindset and measure how the actions I perform are working with respect a level of exposure that I want to take.
Definition of level of exposure
- Perform operations between 0,5% and 2% of the value of your portfolio.
- Understand that for higher volability, the time-spam for trading has to be short, as the risk exposure is higher.
- When you define a move you have to define the amount or percentage that you expect to earn.
- You will have to define a ratio of earnings/loss.
- This ratio should be between 2 – 3. This means that if you expect to with 20 points, you should stop when you are losing 10 points; this corresponds to a “2” ratio.
- A ratio close to “2” is more conservative. A ratio close to 3 is more risk.
- If you lose 20% of your portfolio, stop trading, think about what is happening with the right perspective. If you not do it, you have high percentage of losing all.
- A loss of 10% in a month is unacceptable, this is also an event that should trigger you to stop.
- Backtest, backtest and backtest is an exercise that really improve the results and reduce the risks.
- Review trading bias regulary.
- Define where to put the stop-loss.
- Do not touch the stop loss.