July 30, 2021

Risk Management: Ed Khan’s Professional Opinion. Part 1

As with any other business, there is risk involved in trading. Unfortunately, you can't get rid of it, but you can learn how to manage it. Today we will talk about risk management (RM) (familiarize yourself with the basic concepts of this system in our article) and money management (MM). 

Instant deposit liquidation or stable income in the long term - RM and MM are responsible for all this. These concepts created a lot of myths and rumors: starting with "If the strategy is good, no RM is needed", ending with "Grail exists!". Equite asked Ed Khan, a trader with 9 years of experience, to dispel misconceptions about risk management and answer key questions.

What is the difference between an amateur trader and a professional in terms of risk management?

That’s the thing, a dilettante does not engage in money management! Any trading system consists of a strategy (rules) and MM/RM. A distinctive feature of an amateur is the focus on strategy. He is looking for a perfect combination of indicators, channels with signals that can be traded, etc. As a result, all his work is flying on one wing or riding a car with one wheel. Everything works differently! Therefore, many people get disappointed and leave the market forever.

P.S. Find out what qualities a successful trader should have here.

What are the basic tools that the right trader should use when managing risks?

I'll give you three quick tips. First, you need to choose a money management model. Decide whether you will use static risk (the same for every trade) or dynamic one (increased or decreased risk, depending on the trading result). Here I recommend heightening the risks as soon as you have the average drawdown. You need to know it based on the results of back-testing (you must have tested at least a year!). This will give an understanding of when the drawdown is standard, and when it is exceeded. The last one may reflect a" breakdown " of the system.

Second, choose a fixed lot model or a dynamic one (whether the number of contracts will depend on the distance to the stop loss). I will give you good, simple advice – the volatility is always different (on a trend and on a flat). So, you’d better use a dynamic level. The option with a fixed lot is actually ridiculous: BTCUSD can easily reach $3000-5000 when there are no pullbacks, but it is not able to do this in a flat/consolidation for months.

Third, maintain statistics on real trades. Checking the increase or decrease of the deposit is not enough. You have to keep track of each transaction and the trading result. This will give you a clearer picture of what manipulations with RM and MM can be carried out.

What is the difference between bots and manual trading in terms of risk management? In quiet time and during turbulence?

There is no difference at all! In the bot, the author puts rules that a person could follow as well. There are scalper bots that make dozens of transactions a day, and those that hold a position for weeks. The market is now dominated by averaging bots. But no one prevents a reasonable trader from choosing one that trades with stops, uses conservative MM, etc. That is, to turn the trading rules into code. The main difference is that the bot acts out of emotion. A person easily falls into a state of tilt – the determination to win back his money. The bot is not affected by this and can help anyone who has problems with self-discipline.

We will continue to talk about risk management in our next article. Don’t miss it, you will see a lot of interesting things! Do not forget to follow us on social media: Twitter, Facebook, or Telegram

Telegram channel of the author - https://t.me/edkhan_cryptogallery