Risk Management Trading Forex, Stock Market and Futures: This video (and article) gives you insights into risk management and money management in trading, which will definitely help you tremendously in your trades.
This is some of the best risk management trading advice that works very well if you’re trading Forex, the stock market, and futures.
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Risk Management Trading
Welcome to this video on risk management trading for FOREX, the stock market, futures day trading, swing trading. Really, trading is a lot about risk management. Professional traders care more about money management and risk management trading than we do about indicators, candlestick patterns, support resistance, all that stuff that most people are looking at. What time interval should it be trading, which is the best market, all that stuff, sorry, not the most important thing and what is most important is what most new traders completely ignore. New Traders, I find, are obsessed with indicators and the indicators can be helpful. They can be a part of your trading toolbox. No problem there. I’ve got a great indicator, by the way, that helps you to time your entries and exits with amazing precision when used as part of an overall trading plan.
And part of that trading plan must be, in fact not only a part but at the center, I would say, must be your money management and your risk management trading. So let me give you three examples of what I’m talking about and some of you are going to leave this tutorial being a little discouraged. You might even think you know what? Trading is even a lot harder than I thought.. I thought it was already hard and now I think it’s harder and if that’s what you think, good, I’ve done my job because it is harder than you even think it is. So here’s principle number one. So let’s say that you are trading a market. I’m just using round numbers here and I’m going to use some round numbers throughout this just to make the math easy for you just to illustrate certain principles.
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So let’s say that you are in a market that’s at $10, whatever that market might be, your long, and it goes down to $5. So what have you lost? What percentage of your position have you lost? We’ve lost 50 percent of your possession, right? If you were in a $10, it goes down to five. Now your position is worth $5. You’ve lost 50 percent of your money. So now, how do you get back to even? Well, it just has to go back up to what, $10. Then you’re at breakeven. Here’s the tricky part though. It doesn’t have to go up 50 percent in order for you to get breakeven. Now that it’s down to $5, it actually has to double in price. So to get from here to here, the market actually has to go up 100 percent.
And that’s really what this whole tutorial is about today of how making money is harder than you even think it is, with an emphasis on keeping your losses small and letting your winners run. You’ve heard that slogan, well, I really want to emphasize to you how important it is to keep your losses small because letting your loss moving against you is absolutely devastating. More than you might even realize. So going down, you lose 50 percent. To gain that back, you’ve got to double the position, the price of the stock, FOREX, futures, whatever you’re in. And yes, the market is looking at percentages. The market is not as likely to go up 100 percent as it is to go down 50 percent. In fact, then you add the human dynamic in there that markets tend to go down faster than they go up.
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And many people attribute that to mass psychology. That fear is a stronger emotion than greed. So now, we don’t only have to fight the mathematics of it here, now we’ve also got to fight human nature. And that’s another factor that makes it even harder to get your money back. The second issue I want to share with you today is about unrealized losses. This is where people are in a position and it’s still live. So you’ve got a position and it’s going down in value and you look at your P & L and it ‘s negative, but you haven’t sold the position yet. Therefore, you haven’t cashed in and balanced out your account. Now, a lot of people will say that those unrealized losses are unrealized which, in a sense, is true in the sense that you haven’t sold your position and locked in the losses
But I think that there’s a lot of people out there, in fact, I know that there are who don’t really think it’s a loss until you sell your position and that I totally disagree with. An unrealized loss is a loss right now. It is real and I can’t say it’s realized, but it is real right now. In fact, I even heard this in a podcast just yesterday we’re sadly a host of a financial podcast was saying that even if your position is down, he was talking about currencies, as long as you don’t sell, then you really haven’t lost any money yet. And boy do I disagree with that. Another place that you’ll see this is with options traders and they’ll talk about, we’re going to repair this losing option position and once we add this second leg, then you’re back to break even. Really? No.
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I’ve even raised my hand and classes where they’ve talked about these so-called option repair positions and confronted them saying, listen, I’m a future’s day trader and I can tell you when you’re down, you’re down. That money is not available to you. In fact, if you don’t believe me, call your broker. Let’s say that you’ve got a, again, let’s just keep numbers simple here, $10,000 trading account in and is down to a 5,000 of unrealized losses. And you want to buy another $5,000 worth of whatever. The broker is going to say, no, don’t think so. Then you’ll say but I’ve got $10,000 in my account, and he’ll say, no, you’ve got $5,000 and you will say, no, I got 10,000 because I haven’t cashed out. I haven’t taken the losses on this $5,000 loss, and he’s going to say can you say margin call?
So that’s how they look at it in the real world because that is the real world and that is real. Those losses are real right now. Whether you’ve cashed out to position or not, the money is not there available to you. You’ve got to understand that. And this, I think, is a false security that a lot of people have when they let their losses run, instead of keeping their losses really tight and cutting their losses is that they have this mindset that, well, it’s not a real loss as long as I don’t cash out the position. Wrong. Take that red P & L, in this case, the L, very seriously, it is a loss right now in real time and that money is not available to you. And it is a loss.
Money Management Trading
Now let’s finish up with a few other things. And this is, again, how important it is to avoid major losses and to cut your losses short. First of all, remember every time you take a trade, it’s immediately a loser. Every time you take a trade, you are immediately in a losing position. Why? Well, a couple reasons. Number one, the spread between the bid and the ask. Number two, what else we got? Well, that’s a bit in here. We got commissions, right? We’ve got fees, exchange fees, broker fees, and so forth. So every time you enter a trade, you’re in a losing position. Think of it almost like poker. We’ve got to ante up. So to play the game, you’ve got to pay these fees. All right?
So immediately, even though if your P & L on your charting platform doesn’t calculate this in and it looks like I’m up several ticks, but that may not include this. Now, some charity platforms allow you to calculate that in and that’s great. That’s actually how I set mine up because I want to keep myself aware of all that. Now, let’s talk about your winnings. So you win and that’s great. You’ve made some money. Let’s say that you made 100 bucks. Okay? No, you didn’t. Why? Because, well, first of all, you got to pay taxes on that. I’m in the largest tax bracket. And that’s roughly, we’ll again use round numbers, people in different states and countries are watching this.
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By the way, I am not a CPA or financial professional or tax professionals. Don’t take any of these numbers literally at all. Make sure you talk to your tax professional as to exactly how this is going to work out. But roughly I pay like 40 percent in federal tax, then good old California where I live, we’ve got our estate taxes. So that’s another what, Ten percent or so? And then maybe you’ve got your self-employment tax. We wouldn’t even put that in there, but if we put that, we’re up to 40 or up to 50, we’re up to 60 percent that’s being taken out then, maybe it got spousal support and maybe you’ve got child support.
And pretty soon, what do you got left? Maybe 20 percent? And now, all of a sudden, you realize that your winners, you thought you made, let’s say $10, but you only made two. And that’s on the winners. Then our good old friend, the government, generally, they are very happy to take a percentage of our winners, but they don’t really want to make much allowance for your losses.
Futures Trading Risk Management
So they will often limit the deductions that you can take on your losses. Again, talk to your tax professional about that. And each situation is different. People are in different tax brackets. How the tax is calculated, which taxes are calculated, all that will vary from person to person, situation to situation with your trade through a business or a personal account, countries, states, etc. So I’ve just got to qualify all of that. But the point is, you can see the big point here, you think you made, again, we’ll use the number $100 now and no, you made 20. Or maybe you made 30 or maybe even made $50 after all of this. Still, what you think was a big winner was only half as big.
So this is why it’s so important to not only cut your losses but let your winners run. Because your winner on your P & L on your charting platform, that isn’t what it is. That is not what you’re putting in your pocket. The reality is it’s going to be a lot less. Find out for yourself with your tax professional what actually will be for you as an individual. Okay, well now that I’ve got you all motivated about trading, but again, you know, at least I’m transparent, at least I’m honest about this. This is the kind of stuff you need to really understand that it makes it even harder to make money. So what you do need is a good risk management trading plan. You need something that’s realistic in the trading world so you can make some real money.
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