Risk Management Guide

READ THIS BEFORE YOU START USING OUR DISCORD / APPLICATION

Risk Management 101: A Required Reading by Kevin Wan

Recommended Risk Management Magic Numbers:

Set Aside: 6 Months Worth of Living Expenses + Food -> This is MONEY YOU NEVER TOUCH

Bankroll Minimum:

$2000 Aside from the living expenses, you need a total liquid net worth of at least $2000 before you start trading .

Account Size:

5-10% of Bankroll. If you are trading with more than 10% of your bankroll in a trading account, you will make mistakes and you will find it harder to cut losses. Stick to this magic number and watch yourself make consistent upswings stress free.

Trading is a Marathon. What do we mean by this?

There will be extended periods of time, where trading just will not present big opportunities. There will be extended periods of time, where we have a bull run and it is extremely easy to make money. It’s understandable if you want to trade more during these times, as the expected value is much higher. It also makes more sense to hold your positions for longer, as the market trend will be much less likely manipulated by algorithms, and more driven by consumer demand. As a trader, we must understand when the market is +EV or -EV to trade in. During extended periods of downswings, there will be much less traders and many more predatory algorithms that are there just to make you lose in the short term - counter trading you and others until you close your positions at a loss, or making you go through large drawdowns thus making it harder for you to last in the trade just to see a win. Like the market has always once said “the market can stay irrational more than you can stay solvent.” What does this mean? This means that the charts can make 0 sense, for a long enough time for you to lose all your money, before it starts to make sense again. We’ve seen this happen time and time again - big wicks down, just to hit stop losses and make people’s options contracts suffer from theta burn. We’ve seen charts begin to look like they’ve bottomed, and only bounce 10-20% before going down further and create new lows. Generally, you don’t want to trade at all when the markets are behaving like this - we’ve seen this in low volume environments where it’s very hard to keep your trade at a win, especially if you hold too long. We’ve seen people who are disciplined enough to take profits after 1 leg have success in these markets - but other than that, it is really hard. DO NOT TRADE LARGE SIZE IN THESE TYPES OF MARKETS. Why do I say this? The larger the size you are trading, the more appealing it is for predatory algorithms to trade against you during low volume markets. It will be you vs the Algorithm, and the algorithms are run by large funds and banks that have much more money to outlast you in this battle. The best time to trade, is when many retail traders across the world are trading the same asset classes and there is a high amount of $ volume consistently going through an asset. This generally occurs when there’s new adoption or hype accumulating in specific industries. Examples of this are when the 2017 crypto bull market occured, or when covid started, and we saw an uptick in demand for clean energy and electric vehicle stocks - this allows us to ride the wave as a minnow in the ocean, masking ourselves in the large crowd. During these moments, there’s too much money going through the market for large funds and algorithms to trade against us. These are the best times to size up, because given the amount of $ volume going through this specific asset - we will never be targeted.

Trading is much like poker - it’s impossible to win every trade, and you need to know when it’s time to fold and accept a loss.

The biggest problems most traders have - is that they’re not setting a “Cut Loss” area, or understanding the price action and technical scenarios that indicate the trade is no longer valid. This unfortunately, is a skill that requires harnessing and mindset issue that requires re-programming. Work on developing your skills in this area - analyze losing trades, and the environment that occurs before the trade goes south - over time you will understand, that it’s no longer worth having your money at risk in certain scenarios and that it’s better to just wait for a new opportunity to present itself.

TRADING IS ALL ABOUT SHOT SELECTION.

This problems stems for our subconscious programming that we have to be “Winners” all the time - from the day we grew up as kids on the playground playing sports, to taking tests at school we’ve always wanted the best results in everything we do. WE WILL DO ANYTHING to win the trade without taking a loss, even if it means we have to hold down to 80%. Let’s put this into perspective. When your position has gone down 80%, it will require you to see a 400% (5x gain) upswing from that moment just to break even. If you are down 50%, it requires a 100% on the equity you have left in that trade to breakeven. Unfortunately in trading, it’s impossible to have complete control over what goes on, thus taking losses is extremely necessary. Knowing how to quickly cut that loss In poker, it’s all about folding when you know you’re behind - to minimize losses on losers.

Gaining Expected Value

Most don’t understand this, but in trading, saving money is also making money. Thus when you cut a loser short and prevent yourself from suffering bigger losses - you are essentially adding money to your stack that would otherwise be gone. When you start to win, you will win bigger because you have more to work with, and the growth of your account will occur at a faster rate. A lot of market movements are out of our control, and a trend can be destroyed at any moment by someone with a large account - taking note of when this is occurring will help you greatly in determining when you can let a position go.

Learn From Other People’s Mistakes

Some people are used to learning through their own experiences - this Is unfortunately a very costly way of learning, and I suggest learning from other people’s mistakes and failed trades instead. That’s why Xtrades, we allow people to post their entries and exits in real time, which gives insights on how people think, and the types of entry and exit points they are targeting on the charts. This is how I personally have learned - through reparation and memorization of charts. Everyone is different, find your own best ways of analyzing the technical and fundamental data behind trades.

We also provide stats that show how traders trade - so if you find someone that has a style that suits you and that person has had success with that style, I suggest following their trades very closely. Our app and it’s notifications feature helps with exactly that.

Why Simply Tailing Alerts Doesn’t Always Work

By the time you follow an alert, it could have already moved 2-5 points. This puts you at a severe disadvantage to the people that you’re following. You’ll only be able to achieve a fraction of their results generally with smaller wins than them, and bigger losses (due to tailing and being late to the trade).

Instead, if you build the knowledge yourself to make your own decisions - you can use alerts as confirmation signals, where you can confirm that traders you respect are seeing the same bias as you. This gives confidence and gives you a community of people to talk about the trade with.

Alternatively, you can use people’s false biases against them - by trading against them when you are confident they are wrong. This is a more advanced tactic, but is definitely useable when you know the audience you want to fade at any given time.

Stop Losses and How to Use Them

When To Use Stop Losses

Stop losses are useful in high volume environments where you can accurately predict a price base in which there is demand. If the likelihood of moving under that price is low, simply because there is too much demand - then your SL is generally a safe, and will only execute under extreme and unusual circumstances

When Not To Use Stop Losses

In a highly volatile market, where your risk levels are nearby and you expect the possibility of a stop out wick (or scam wick, we call them) to occur - you want to set Tradingview alerts instead, so you can know when your risk levels are being hit / touched without actually closing out your trade. This is important as it allows you to utilize your human brain to determine whether the structure is actually failing, or was it a liquidity stop out point before the upside. These are called mental stop losses - which are highly effect.

Utilizing Rules

Over time, you will realize that there are certain things that you ABSOLUTELY do not do as a trader. Here are a few prime examples: - Moving your stop loss once the price has gotten close. This is an extremely bad habit that one should never build, as it could cause you to blow up your account. - Going all in. Going all in is never advocated for because when you lose 50%, you will then need to gain 100% on the same amount of leftover capital to breakeven. - Chasing: One should never chase an asset, when the entry that you perceived to be a prime entry has been missed. This is a bad habit, as you will be teaching yourself how to act out of FOMO - which is an emotional losing habit.