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AI FAE TRADING BASIC COURSE CHAPTER 6
Money management
Introduction
Money management is a crucial aspect of trading, which determines how risks are managed and capital is used effectively. The aim of money management is to minimize risk while maintaining Maximize potential for reasonable returns. Good money management helps Traders to maintain and increase their trading capital over a longer period of time, by setting rules for trade size, loss limits and profit targets. It protects traders from being influenced by emotional decisions or unfavourable market conditions to incur excessive losses.
The demo account
In the world of trading, the use of demo accounts is often advertised as a risk-free training method for new traders. These accounts simulate real trading environments with virtual money, which means that no real financial losses occur. Successful trading with a Demo account is often the misunderstood assumption that success in a demo account are directly transferable to real trading situations. In reality, Traders in demo accounts acquire a false sense of security because emotional Aspects such as fear and greed, which are present in real trading scenarios, in Demo account trading is missing. This can lead to excessive risk and unprepared decisions in real trading. Nevertheless, demo accounts are suitable for to try out strategies.
Psychology and the right position size
Psychology plays a crucial role in Trading, as emotional decisions often lead to suboptimal trading results Choosing the right position size is an essential Part of risk management that helps to avoid emotional wrong decisions It is about determining the amount that a trader is willing to on a single trade. This should be a small percentage of the total capital, typically between 1% and 2%, to reduce the risk minimize and protect trading capital in the long term.
Trading consists of around 30% craft and 70% Psychology. The craft can be learned with courses like this one. The Aligning psychology with trading is a major effort. Here are some Coaching is particularly useful, where a trader receives 1 to 1 mentoring and the individual trades. In this context, I also recommend to keep a trading diary. This is now also available electronically and is also filled with the emotions that are present in every trade.
The psyche is the biggest obstacle to long-term to be successful. There are a few ways to improve your psyche as much as possible to remove from trading:
1. Set SL and TP before the trade and not change more
2. Fixed time limits if you decide For example, to keep the trade open for only one hour and to stick to that hour
3. Automatic trading systems (bots), I go later in more detail
Determine position size correctly
The correct determination of the position size is crucial for effective risk management in trading. To correctly size the position traders should determine the percentage of their total capital that they are willing to risk on a single trade. This amount, often between 1% and 2% of the trading capital, is then used to determine the size of the trading position based on the stop loss distance. This means that the position size is adjusted so that the potential Loss when the stop loss is reached this specified risk amount This ensures that losses remain controlled and the capital is protected across multiple trades.
Example: Let’s say you have a trading account with a balance of 10,000 euros. You decide that you are ready to risk a maximum of 1% of your capital per trade. This means your risk per Trade is 100 euros.
Suppose you want to buy a stock that is currently trading at 50 euros. You set your stop loss at 48 euros, i.e. 2 euros below your purchase price. The calculation of your position size then looks like this:
Risk per trade / stop loss distance = position size 100 Euro / 2 Euro = 50 shares
So you should buy 50 shares of this stock to ensure that your loss does not exceed 100 euros if the Stop loss is triggered.
The CRV
CRV (reward-risk ratio) is an important Concept in trading that serves to estimate the potential risk of a trade in ratio to its potential profit. The CRV is calculated by dividing the expected profit by the possible loss. A CRV of 2:1, for example, means that for every potential loss of 1 euro a profit of 2 euros is expected. This helps traders to make informed to make decisions and ensure that the trades have a favorable risk-reward ratio.
Example of a 2:1 CRV:
Would I place a short trade here now and Set a stop loss at 17307 points and speculate that the price will 17005 points, the CRV would be just under 2:1. In other words, I would have the chance to win twice my risk.
The hit rate
The hit rate in trading measures the number of successful trades in relation to the total number of trades executed. It is often expressed as a percentage and is an important indicator of the Effectiveness of a trading strategy. A high hit rate means that a large proportion of the trades were profitable. However, the hit rate should always in combination with other indicators such as the risk-reward ratio (CRV) and the average profit or loss per trade to to get a complete picture of trading performance.
The hit rate and the CRV are the only parameters that determine the success of a trader.
Example calculations for hit rate and CRV
- Hit rate :
- Assumed, They made a total of 100 trades and 60 of them were successful.
- The Hit rate is calculated as follows:
Hit rate = number of successful trades / Total number of trades × 100
Hit rate = 60 / 100 × 100 = 60%
- Reward-risk ratio (CRV) :
- The average profit of successful trades is assumed to be 200 Euro.
- The The average loss of unsuccessful trades is 100 euros.
- The CRV is calculated as follows:
CRV = Average profit per winning trade / Average loss per losing trade
CRV = 200 / 100 = 2.0
- Expected value (Profit per trade) :
- The Expected value is the average expected profit or loss per trade and is calculated as follows:
Expected value = (successful trades × average profit) − (unsuccessful trades × average loss) / total trades
Expected value = (60 × 200) − (40 × 100) / 100 = 8000
These values give you an insight into how effective your trading strategy. A hit rate of 60% with a CRV of 2.0 shows that your strategy is potentially profitable as long as the CRV consistently exceeds 1 and the hit rate remains stable.
Why trading is boring
The expression that trading is boring may be may sound surprising at first glance, especially in a world that is often Excitement about quick profits and dynamic market movements. However, behind this statement lies a deeper truth about the discipline and the mental demands of successful trading.
Rationality over emotion
Trading should not be driven by emotions. Successful traders follow a set plan and strict rules instead of to react to "gut feelings" or to let the excitement of A methodical and systematic approach reduces the risk of impulsive decisions that endanger capital can.
Consistency is key
Boring trading often means that you follow a proven system that is repeatable and reliable. This includes the constant Searching for new strategies or frequently changing the approach, which often brings more stress and uncertainty than it offers in value. Consistency in the application of your strategy is crucial to long-term to be profitable.
Avoiding overtrading
When trading becomes exciting, there is often the danger of Overtrading, where too many or too risky positions Boring trading means that you only trade when really good opportunities according to your analysis and strategy. This helps manage risk and prioritize capital preservation.
Psychological stability
Emotionally charged trading can be psychologically stressful and lead to exhaustion. A steady, boring work routine Trading approach helps to remain mentally stable, which in turn leads to better decision-making ability.
Summary
Ultimately, the idea that trading has to be boring is a reminder that successful trading is more about discipline and consistency than seeking excitement. The best traders are often those who have their emotions under control and their trading plans methodically. This leads to sustainable performance instead of short-term Successes that are difficult to repeat.
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