Trading System-Risk Management

Wolf king
5 min readOct 8, 2023

Risk management is a word that everyone who does trading, often hangs on the lips, but most people tend to just talk about risk management; Unable to actually establish the awareness of risk management, relying too much on intuitive trading, so that it is impossible to achieve long-term use of fixed trading strategies to achieve profit purposes.

Today I will share with you a systematic risk control concept. I hope it will be of some help to your futures trading in the future. Remember to forward and like it~

What should you pay attention to when trading futures?

First of all, the biggest advantage of futures trading is that small funds can be used as margin guarantee transactions, which can control risks more flexibly than spot prices; similarly, the biggest disadvantages of futures trading are the same as the advantages. While using leverage to amplify profits, you need to The risks taken will also be magnified in proportion;

Investors with poor trading experience often use leverage incorrectly (mainly referring to excessive magnification), coupled with psychological instability, they are prone to the following serious situations:

1. Wrong risk management
Improper use of leverage, or operations with a low winning rate or low profit-loss ratio;
Many novices tend to ignore the advantages of using leverage, blindly use too high leverage, or too high number of contracts, focusing on the immediate potential profits and ignoring the potential risks brought by leveraged trading, which invisibly magnifies the risks, resulting in Positions are overexposed to risk and liquidated;

2. Immature mentality
Losing money or missing out on the market leads to greed, regret, fear and other negative psychological effects that affect judgment, making it impossible to operate according to the strategy;

3. Gambler’s psychology
After losing money in the market, you want to make back the loss through a larger margin. If you make a profit, you want to continue making profits with a larger position;

There may also be another situation where the trend reversal is close to the stop loss, but because the position on the market is at a floating loss, you choose to continue to hold the position, going against the trend, resulting in amplified losses, or even liquidation; or when the price has reached a floating profit, The strategy has a profit-taking target, but due to greed, one chooses to continue holding the position, causing the original profit to be taken back or even turn into a loss;

In the trading market, retail investors often make too many mistakes and get lost in technical analysis. They pursue the perfect strategy with a 100% winning rate and ignore the implementation of the general principle of stop-profit and stop-loss.

What is risk?

Risk is the uncertainty of future investment returns in the trading market. Loss of income, or loss of principal, can be included in investment risk. The characteristics of risk include objective probability, meaning that the risk can be taken to prevent the occurrence, or reduce the loss caused by the occurrence of a risky event, but it is impossible to completely eliminate the risk, because to do so means that we will also eliminate the future gain. This also shows that risk management in the trading market is very necessary and very important.

What is risk management?

Risk management and control means taking effective measures to reduce the probability of occurrence of risk events, or effectively reduce the loss caused by risk events after the occurrence of risk events, and control the loss to an acceptable degree. Traders with less trading experience tend to focus too much on technical analysis and trading strategies, and place too much trust in strategic indicators. These traders often inadvertently ignore the probability of the occurrence of risk events, the entire principal as a margin to make a one-time bet trading, such traders, the final result is only death.

The TRB short trap we set in advance was kicked out after locking in some profits

Importance of profit-loss ratio

A profit-loss ratio that is too low will result in more losses and less profit.
Assuming that our risk management strategy is to set the profit-loss ratio of each transaction to 1:1, we must at least maintain the winning rate of the transaction above 50% to ensure stable profits for the position;
If the profit and loss ratio is set to 1:1, for any transaction we should ensure that the profit and loss ratio is greater than or equal to 1:1 before entering the market. Otherwise, even if the winning rate is high, the effective profit and loss ratio cannot be achieved. It may also cause a large profit retracement or even loss after a loss occurs.

A higher profit-loss ratio in the trading strategy can effectively make up for the problem of lower than 50% winning rate in trading;

for example:
In an account with 10,000 USDT, each transaction uses 1% of the position as the cost (100 USDT), and the profit and loss ratio is controlled at 1:3. In 10 transactions, there will be an average of 4 take-profits and the remaining 6 losses. purely looking at the winning rate, the trading winning rate is only 40%. Such a result is definitely unsatisfactory.

However, based on the profit-loss ratio combined with the winning rate, the average overall profit for 10 transactions falls within:
(100USDT (1% cost)*3 (profit-loss ratio)*4 profits) — (100USDT (1% cost)*1*6 losses)
=1200USDT-600USDT
=600USDT

We can see that with a trading strategy that controls the profit and loss ratio at 1:3 each time and uses 1% of the total position as a cost, although the winning rate is only 40%, we can also get a 6% return in every 10 transactions. The most important thing is that even if a loss occurs, only 1% of the positions bear the risk of loss.

This is our futures trading data statistics for September

This is also why we pursue a high profit-loss ratio. Only a high profit-loss ratio + a high winning rate can achieve effective compound interest.

Summarize

In the trading market, risk management accounts for at least 80% of the importance, and the remaining 20% ​​is the trading system and strategy. Avoid blindly pursuing technical analysis and indicators, strictly implement basic skills and risk control, and avoid gambling operations such as heavy positions and full positions. The long-term stability of position funds is the correct trading direction.

The futures market is highly volatile. It is recommended that investors strictly implement risk management. Only by surviving in the trading market can we have the opportunity to achieve more trading goals.

If you can’t grasp the rhythm of the futures market, you can join our money printing team and print more money together

👀Learn more
📍 Free Telegram 👇

https://t.me/+uY3I2_02_FRjMDk0

➡️If it is useful to you, please remember to forward it📤Like❤️~

--

--

Wolf king

Thank you for following!I am an accurate and fierce spot and futures trading strategist.Follow me and print money, find me on TG:@wolf_king8