Chapter 4 - Trading là một hoạt động kinh doanh được thực hiện bởi những người chuyên mua

Introduction Dear Friends,
I am proud to release the fourth instalment in the new mentorship series. The
aim of this tutorial is to make you master risk, trade and personal routine
management to the standard of a professional trader. If you read this slowly
and with time, you would have mastered all of the skills after practising for
a while. Remember to read the references in the links if you are not familiar
with it. Additionally, improvement in one aspect of life spills over to all others
and when I became disciplined as a trader and documented everything, I didn’t stop.
My aim after the release of this chapter is to provide cost free and open to
use best trading tutorials which can be used practically to trade, make the
money and also beat the market at times.
The inspiration to share this tutorial is from my trading mentor who had the
quote, “If you don’t track, you don’t care.”
PS: I was late in publishing the tutorial because of some restructuring within
the team, the mentorship will carry on at lightning pace from now on.
Please share the doc if you like it and take care. Love, EmperorBTC Effective Risk Management
What should be the size of your account as a new trader?
Without a doubt, it is important not to invest all of your money into your
trading account. Instead, it should be substantial enough that losing the
entire account would have a significant impact, yet not so substantial that
it would lead to financial ruin. The table below shows how much profit is
needed to recover your losses during a drawdown. Therefore, it’s
important to cut your losses. For example, if you lose 80% of your capital,
you need to make 400% just to breakeven.
Table 1.1 : Risk Management
PERCENTAGE (%) REQUIRED LOSS OF CAPITAL
TO GET BACK TO BREAKEVEN 10% 11% 20% 25% 30% 43% 40% 67% 50% 100% 60% 150% 70% 233% 80% 400% 90% 900%
How much should you risk per trade?
The standard advice handed out to beginners is to risk 3 percent or less
for each trade. Well, if you’ve read chapters 1-3 diligently, then you know
that this doesn’t make a lot of sense. What you risk per trade should be dependent on three factors: 1. Expectancy from the trade 2. Hit rate of the trade
3. Frequency of the particular set-up
As we have now covered the basics, it is important for you to start some
serious journaling. Even as a discretionary trader, you should have a set
timeframe, set way of analysing and a set entry criteria. Alongside this,
there is extra documentation that needs to be maintained as shown above. 1. Expectancy of the trade
Not all set-ups are equal. The R:R of a trade will depend on the
set-up that you pick and will be very varying. However, when you
have defined rules, you know the probability of how often a set-up
reaches TP1 (Take Profit level) or TP2. How often does it reach TP1 but does not reach TP2?
Let’s take a simple well known set-up I used to swing trade with for example: Entry Conditions:
a. Breakout from resistance and flip and retest EMA to support.
b. Breakdown from support and flip and retest EMA to resistance. Stop Loss:
Below the resistance/support level. Targets:
a. Last low/high that was broken to break into downtrend/uptrend before reversal.
b. The high/low before range breakdown/breakout took place.
Now that we have these criteria’s listed, we can find our
expectancy of the trade. How often does target 1 get hit but not
target 2. How often does target 1 get hit and then we get stopped
out. These are alternate probabilities that I have learnt to
document in order for me to be able to improve my trading. This
means that every time you trade a certain set-up, you need to fine
tune all these criteria’s and then update your probability readings
when it is done, this is why it is important to only focus on a few
strategies that work for you and stick to them until it is proven by
numbers that they do not work.
However, the formal definition of expectancy is different. Contrary
to common beliefs, neither win rates nor being ‘right’ nor perfect
entries give you an edge. The only way for you to know if your
strategy has an edge and wil be profitable in the long run is to
calculate the strategy’s expectancy.
Expectancy is defined as how much money, on average, we
can expect to make or lose for every dollar/euro/pound we risk.
The formula for expectancy is
E(R) = ((1+WIN/LOSS) x WIN RATE)-1 Where: R = Risk on each trade Win= Average winner Loss = Average loser
Win rate = Probability of winning
Let's put this formula to work in a game that we are all familiar
with: a coin toss. With a fair coin, there is a 50/50 chance that it will
land on heads. Let's assume you are wagering $1 with a pay-off
such that if the coin lands on heads you win $1, but if the coin
lands on tails you lose the wagered amount.
Putting this in the expectancy formula we get: E(R)=((1+1/1)0.5)-1=0
Your expectancy for this game of coin toss is 0; thus if you repeat
this game many times, you will neither make nor lose money.
Let's say you are offered two games with the following probabilities
Game A gives a 95% probability to win $10 but a 5% probability of losing $1,000.
Game B gives a 5% probability to win $1,000 but 95% probability of losing $10.
Which game would you play?
Most people would choose Game A because it gives an almost certain win of $10.
However, Game A has negative expectancy and will cause you to
lose money over time. This is a very popular way for beginner
traders to be lured into following strategies that have negative
expectancy. These strategies often have negative skew, which
means that they win small amounts very often but lose big when
they are wrong. Beginner traders love seeing a lot of winners – so
it's an easy sell. It can be many months and even years before a
negatively skewed strategies blow up - so for the untrained eye, it’s not easy to spot them.
The correct game to choose is Game B as it has an excellent
expectancy of 4.05 and you should play this game as many times as you possibly can.
Professional traders understand expectancy and when they trade
they make sure that their wins are much larger than their losses, a
strategy we refer to as having positive skew - where a large gain is
more likely to happen than a large loss.
This is how you see whether your trading set-up is worth taking or
not. For a beginner trader, it is essential to pick and trade those
set-ups that will give you higher return on average and ignore
those with less even though they have a high hit rate. The reason
is simple, position sizing, if you only have $1000 to trade with and
you are risking $10 per trade while trading Bitcoin, to scalp, you
might need 30X leverage and even after that you will not be able to
take another trade until this is done with. This is why you should
always go for high expectancy set-ups in general and even when
you’re trading regularly even if the hit rate is lower than some other set-ups. 2. Hit Rate of the Trade
This is fairly simple and well known. How often is a trade not
stopped out. You can define it as how often a trade is successful
but as we have learnt, successful trade is an ambiguous phrase,
as we don’t know whether success means final target was
reached, etc. There will also be trades where you will move your
stop to entry or higher and the target will not be hit, how do you
quantify those? You have to document everything based on what you do.
Above are some popular trading patterns. However, every trader
trades based on their own rules and manages trades in their own
style, thus, you wil have to recreate these. Average price change
will depend on the timeframe you’re trading on. Hence, using my
statistics or anyone else’s for that matter will not help you improve
your trading. Effective risk management is where you analyse
every single aspect of your trading and try to fine tune it as per
your style and the assets that you are trading. I personally have
separate statistics for Bitcoin as well as Ethereum as I’ve found
different hit rates when scalping with the same set-up on both the assets. 3. Frequency of the Set up
It is important to take more risk on high expectancy set-ups that
occur less frequently. For example, your SFP set-up on the daily
timeframe that we discussed in chapter 3 would occur with a much
lower frequency than a range trading strategy on the one-minute
timeframe. If you take let’s say 5 percent risk on the range trading
strategy and it occurs 3-5 times a day. One losing streak could
deprive you of 25% of your account.
For strategy deployment on a live account, first thoroughly test that
strategy 1000 times to know the above metrics about the trade and
then execute it live. To grow your account, take high expectancy
set-ups and size up on infrequent high expectancy set-ups and
size down on frequent but high expectancy set-ups. While growing
the trading account, it is important to do away with low expectancy
set-ups at all times even if they have a high hit rate. All of this
answers the question of how much you should risk per trade if you
want to manage risk in your trading in an effective manner. Evolving R:
Trader Dante popularised this concept and we have talked about it many
times in price updates and also during risk management masterclasses
alongside the first trading mentorship. The simple concept behind
evolving R is that your risk:reward ratio is not static during the course of your trade. For Example:
This is a swing trade you could have actually taken. Reasons for entry:
1. Breakout from important resistance.
2. Retest of level with bul ish pinbar.
3. Entry after the pinbar close. Stop:
1. Below the breakout candle for some leeway. Target:
1. Last significant swing high.
Now, from a fresh perspective, this trade is even less than 1 R:R and does not look very appealing.
However, we could have just bought the 2-touch level blindly if we had some divergence confluence.