Video Transcript:
You can win more trades and still lose money. I’ve seen many traders with strategies that worked, yet they still ended up losing because of one hidden risk mistake they didn’t even know they were making. In this video, I’ll reveal that mistake and show you how to manage your risk the right way. So, let’s get to it.
The problem that a lot of traders have is that they trade with the same position size. For example, they trade with one lot, but they don’t take the trading instrument and its volatility into consideration. In other words, if you are trading AUD/USD with one lot, where the average daily volatility is 70 pips, and GBP/JPY, where the average daily volatility is 200 pips, and you are still trading both with one lot, then you will most likely end up having much larger profits or losses on GBP/JPY and much smaller ones on AUD/USD. This is simply because GBP/JPY is much more volatile.
This can be very risky because, in your trading, you will most likely adjust your stop-loss and profit target based on the volatility of the instrument. For example, if you are day trading AUD/USD, your average stop-loss might be 10 pips because the volatility is not that high. However, the volatility of GBP/JPY is around three times higher, so your average stop-loss might be 30 pips. Trading a 10-pip stop-loss with one lot and a 30-pip stop-loss with one lot creates a huge difference. If you get stopped out on GBP/JPY, the loss will be three times larger than the loss on AUD/USD.
That is why I’m saying that you need to use the same risk for every trade. In this scenario, it would mean lowering the position size from one lot to, for example, 0.3 lots, depending on the trade and the stop-loss distance. In this example, it would mean dramatically lowering the position size on GBP/JPY so that the risk on both trades is the same.
What I said before may have sounded a bit complicated, but it is actually very simple. You simply need to risk the same amount of money on every single trade. Even if you really like a particular trade, you should not risk more on it. You need consistent risk for every trade.
Here, I have two examples. This is how your trading should look. It doesn’t matter which trading instrument you are trading. The risk per trade should always be the same. On the left side, you can see a bad example of what many traders do and why so many of them end up in drawdowns.
Let’s say you took these trades and lost two of them. You lost the trade on Bitcoin and the trade on GBP/JPY. Together, those losses would equal $900.
On the same day, you also won three trades: one on EUR/USD, one on the S&P 500, and one on AUD/USD. From those three winning trades, you would make $290. You won three trades and, let’s say, you were trading with a 1:1 risk-reward ratio. You were right three times and wrong only twice, but you still finished the day with a loss.
That is why you need consistent risk. Without it, something like this will very likely happen to you, and it could be the cause of a drawdown.
How do you risk the same amount of money on every trade? I have a solution for that. It is called Trade Manager. It is software that I developed for the MetaTrader 4 platform. I originally made it for members of my trading course, but now you can have it for free. There is a download link below this video. You can simply download it and start using it. There is no catch. This is the unlimited version, so give it a try.
Let me quickly show you how it works and how it can help you. This is the Trade Manager, and let’s say you want to risk 2%. Let’s set up a buy limit here, with the stop-loss here and the profit target here. The exact placement doesn’t really matter.
As you can see, this field calculates in real time how large your position should be. I’ll move the stop-loss now, and you will see how it recalculates the position size. The risk remains the same.
The wider the stop-loss, the smaller your position size will be. The tighter the stop-loss, the larger your position size will be, while maintaining the same risk per trade. That is exactly what I’m talking about.
No matter which instrument you are trading or how wide your stop-loss is, you are still using consistent risk. That is how it works. It also has many more useful features, so give it a try. It is completely free. Just download it and start using it.
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