‘It doesn't matter how much you make when you are right, it matters how much you lose when you are wrong’ - George Soros.

Fact: 90% of traders suffer losses and leave the market precisely because of lack of risk management and discipline. Most of them ‘lose’ within a few months.

Why?

There are a number of reasons:

They do not understand the basic fundamentals of the market

No clear strategy

Do not stick to their strategy

Don't know how to control risks

In this article we will talk about the last item on this list - risk management.

The quote at the beginning reflects the key idea: the ability to limit losses is the basis of successful trading / investing / business.

Why are risks inevitable? The market is an environment with a high degree of uncertainty due to human irrationality. Therefore, losing trades are a natural part of the process.

All you can control in the market is the size of your losses. Either you have a lot of money to create deficits and surpluses.

Success in trading is determined not by the number of winning trades, but by the volume of losses in losing trades. This means that even one successful trade can outweigh several losing trades if the risks are controlled.

This is called the risk/reward ratio. Let's take a look at a statistical model where we have:

Our statistical model generated the result:

The final result is plus $74.Let's try to improve our ratio by increasing the risk/reward ratio to 1:3, but we'll have to reduce the number of profitable positions because there's always a price to pay for everything.Let's say it'll be 29% (0.29) of profitable positions.

The statistical model generated the result:

The final result is plus 172 dollars.Please take a look at the profit chart, which isn't perfectly even. There's both growth and decrease, but on the whole, it's positive.

So, what can we take from this?

The most important thing in trading is to stick to your strategy and limit your risks, and don't try to close every deal that's profitable.

Every trade should be part of a clearly defined strategy, not an impulsive decision.

I'd suggest having a look at the statistical model simulator on your own.

Before entering a position, you should ask yourself once again:

If the answers are ‘yes’ and the formation is classic, then we can safely enter the position. If it is not classic, but fits the checklist, then it is better to enter with a correction for greater risk.

SUI coin traded to USDT

On the chart we see a classic formation, according to the directed strategy:

Have a look at the standard deviation for the last 720 bars (you'll see it in the top left corner of the chart). For this timeframe, 1 standard deviation is 7.5%.

Statistically speaking, you can set a stop loss for a short position at about 7% above the current price.

But we'll use the heat map to optimise the position.

Above the second top (above the last bars), there aren't any super large limits as there were above the first top, but there's a group of limits around the price of 5.45 (about 4% of the last price).

If other people in the same boat (short positions) set their stop loss too close to the current price and start to close their positions, the market buying can move the price up a lot. We don't know exactly where the market maker will start to accept this 'toxic' liquidity, so the best option is to put the stop loss above these limits, which is exactly equal to one standard deviation.

When we open a position, we don't know what the result will be. So, our job is to check that the future position follows the strategy checklist, and it's important to watch out for risks.

It's not a classic example (high risk).

DOGE coin is traded against USDT.

On the chart, we can see a non-classical formation on the directional strategy:

Also, there's no volume accumulation at the price highs.

What makes this formation unusual is that the buying continues for a long time, and during this period the price doesn't reach its maximum, but keeps rising because the market purchases don't stop. So, the buyers keep the price above the local minimum in the local range.

This is a pretty reliable sign that the price is about to go up.

The volume heat map shows that market buys are close to limit sell orders, which is a classic sign of a formation. But the state of deficit and surplus is determined only by market participants, i.e. executed trades.

So, this position is riskier.

The steps to work out the stop loss price are the same as in a classic formation:

The result of this position is just as good as the result of the classical position. The only difference is in the initial conditions.

So, how do you work out the risk of a position?

It's important to know that a stable risk over distance will help you earn money.

And of course, knowing where to place a stop loss is important.

Now, we're going to look at how to calculate the volume per position so that we can manage our risk.

First, read the article that shows the formulas for creating the calculator we'll use next - Calculate risk

Here's the input data:

When we use the calculator, we enter the required details and it shows the position size as 259 USDT. If we want to know the funds that will go into the position, we enter the size of the leverage used and it shows us that only 10.39 USDT of funds will be involved in the position.

We now know that our risk to our capital is always the same, even though the trades and price movements are different.

Risk management is one of the tools in trading.

Volume analysis and the Resonance platform are tools that can be used to improve the quality of search and selection of trading ideas.

But remember, if you want to profit from the market, you've got to follow the rules, and do it consistently.