Risk Management Basics

[Debbie 1]

Hi guys! Have a basic  question...How do we start out and create a system in terms of managing risk? e.g. I had 5 winning trades out of 5 today, but only won $20 net because I didn't have a real system. 

1. I was a bit random in determining # of shares to trade. general rule in my head is to not get rejected from the $25k sim money - expensive stocks like TSLA, just put 50 trades, cheap stocks, buy 100 trades.

2. once the stock won a bit, I sold...

.I've studied class 5 on Risk Management, and read Andrew's book "How to Day Trade for a Living." Understood that the reward/risk ratio of 2:1 at least.

QUESTION is: How do you manage risk once the rubber hits the road? What system do you use to manage risk? If it's a spreadsheet, can you share it? And how do you refer to the system when you're in the heat of the moment on a potential trade?

Thanks guys...

 

 

[Rob C 826]

Essentially, all systems are based on "R" risk. Instead of thinking how much money or shares you have in the stock most traders try to think in terms of risk which we commonly call "R". This way all of you trades have a consistent risk and your system should work consistently.  When I didn't use "R", as luck would have it, my winning trades tend to be small and losers big. Actually this is human nature since we will risk more to prevent losses than to gain wins.

Yes the BBT videos and Andrew's book explains "R".  Essentially, it is the monetary distance from your entry to your stop. If you plan on entering the trade at $50.25 and there is a strong respected level at $50, where the price drops below you will stop out, your R=25 cents for this particular trade. If your target is at $50.75, great your risk to reward ratio is 2 to 1 and a good trade. If you get stopped out you lose the 25 cents per share and thus you lose one "R". You should always only lose one R. If the risk per trade you are currently comfortable with is 25 dollars per trade (thus the dollar amount you will lose if stopped out) than the number of shares you will take would be (dollar risk divide by "R"). For the example above that would be 100 shares. 

For every trade the shares will vary even though your dollar risk (if stopped out) is the same. Choose a dollar risk you are comfortable with and I recommend don't change it for awhile. Then calculate your shares each trade depending on your R (monetary distance from your entry to your stop). Your profits will be much more optimized and consistent if you use "R" risk to choose share size.

Kyle has created some amazing hot keys which calculate shares automatically when you choose your stop.  Or you can calculate it manually, which I did for awhile and it worked out fine.

Let me know if that helps answer your question or have more questions.

[Debbie 1]

Hi Rob, This is so helpful! Thank you for taking the time to explain thoroughly.

Can you link me up to the Kyle hotkeys?

When you calculated it manually, did you use an excel spreadsheet in the heat of the trade?

[Rob C 826]

 

Kyle will host a Success Webinar on Wednesday, March 4th at 8:00 pm explaining his hotkeys and taking questions.

Also here is the link in the BBT forums.

https://forums.bearbulltraders.com/topic/716-das-dynamically-calculate-shares-on-risk-or-risk-hot-key-configuration-updated-91019-v21/

You can use an Excel sheet, I have heard of others use one. I personally didn't. Now for the past ~1,5 years I have used my own version of hot keys to auto determine share size. It is much less eloquent than Kyle's. But saves me a couple of clicks which I can't afford at the open. 

[hailchaser2 185]

@Rob C I have a question about R also. I’m ditching my prior goal ideas of $ amount per day, and will start talking about trades and days in terms of R.

I understand using the R in trades i.e. 4R trade would be -.15 stop with target of +.60, but how do you use R terminology for your day. I’ve heard traders say, I had a 6R day, or -2R day. Do they mean if their daily total loss risk is 100, they had 6x that in profits, or do they mean one trade was 4R and one trade was 2R, which adds up to 6R?

Thanks!

[hailchaser2 185]

That’s what I thought, but I’m sure some traders have a set up where they want to risk less because it’s not A+ setup. 
example: I might have a trade where I use the $30risk hotkey because it’s strong ABCD at VWAP. But my other 3 trades that day were only $10risk hotkey trades because they were HOD breakouts or reversals. 
 

So I will more than likely have to just recap R per trade. 
 

Now I know when listening to other traders talk about 4R day, they probably use same risk every trade.

Thanks  PeterB

[Rob C 826]

All that is important is your setups give you consistent results, good or bad. So you can determine what works and make adjustments. Trading in Rs helps with that. Consistent risk should help provide consistent results. So using a different size R for different setups is fine as long as it is consistent within the setup to analyse later. 

I like the average profit divide by the sigma as a good indicator on the quality of the setup. Then use this table (from Van Tharpe Institute):

 

[hailchaser2 185]

@Rob C ahhhhh, that makes sense. It would be much more difficult to track my 4 strategies if I didn’t keep my R consistent for each individually. 

One last question, I like partialing out, usually 4-8 per trade, so to figure out the +R, I’ll have to take total profit divided by initial share size (to get average +R per share), correct?

Also, sorry for highjacking your thread @Debbie

[hailchaser2 185]

Or does Chartlog automatically figure R for trades?

[Rob C 826]

On 2/23/2020 at 7:56 AM, hailchaser2 said:

One last question, I like partialing out, usually 4-8 per trade, so to figure out the +R, I’ll have to take total profit divided by initial share size (to get average +R per share), correct?

 

For that table please use the total profit on the trade divided by your standard risk per that particular setup (i.e. $30 or 1% of BP, etc). 

[Rob C 826]

On 2/23/2020 at 8:56 AM, hailchaser2 said:

Or does Chartlog automatically figure R for trades?

I haven't tried Chartlog and I probably should. I tried Traderview and Edgewonk with terrible results. Both were confused by my cancelled orders on the trade. I am continuously setting orders and cancelling them during a trade. So I gave up on those apps. But Chartlog could be better, I will try it soon.

[Debbie 1]

Thanks so much, Rob! Finally got my Kyle hotkeys set up... Excited to trade with them hotkeys! Bobby, all good!

[Justin T 1]

Hello Everyone,

I have 2 questions regarding total account max loss per day and position size. 

a. What is a recommended max loss per day? i understand that 1-2% risk per trade is good risk management but was wondering on a daily basis with one's whole account. 

b. Example: a $10K account size. $100 risk per trade. R = .50 on a particular trade. my position size is therefore 200 Shares. But the stock price is is $22.50. this would be a $4,500 position size or 45% of my BP. is it normal to have such a high % of my account invested on one trade? 

thank you all for the help and clarity!

[Rob C 826]

Hi Justin, I am a strong believer that your max loss should equal your psychological limit of how much you can lose and still hold your cool and trade smart. I lose it after two consecutive stop outs. So my max limit is -2.5R.

Yes 50% of your account used on a trade is not uncommon. Since you probably have 4 to 1 margin, you will be only using 11% of your BP. Which doesn't sound as bad.