Ross Maxwell - Risk

Ross Maxwell · Test category · Beginner

In this video learn why Ross places such high value on risk when trading and how it helps him stay consistent through profit and drawdown. Learn how to find how much risk is best suited to you and your style of trading as well as all the factors that influence risk and its importance. Hear how poor risk management can negatively impact your trading! Like Ross's teaching? Check out his mentorships with our link below: https://keyzonetraders.learnworlds.com/link/rEugyh

Transcript

Right. Okay. So, welcome to the uh this video which we're going to be focused and looking at risk. Okay. So, um as I said in introduction about myself, you know, I'm very much risk focused uh when it comes to trading. I'm a big believer that, you know, we need to focus on this first. Um by managing our risk and learning how to manage risk, it keeps us in the game long enough to develop the other skills that we need.

So I have a I have like a a belief that you have three pillars to trading success. First one is managing risk and understanding risk. You need to understand how you're going to be impacted, how you need to adjust your risk depending on the style of trading uh trader that you are, your risk appetite, all of these sorts of things. It's a variety of factors that we're going to talk about in a moment.

Uh you then have to develop the right mindset. Um you know, I'm a big believer in sort of meditation uh and and living a a good lifestyle will help you in your trading journey. uh and then finally strategy. And you need all three things in place to be able to become a successful trader.

But the reason I always say risk is the first pillar is because if you don't understand risk and you don't manage your risk, even if you develop the other two, you will not um survive in the markets very long.

However, if you develop the uh understanding of risk and you manage your risk, then even just by managing your risk, you can keep yourself in the markets long enough whilst you develop the other two um the other two uh pillars to be successful.

It's not going to be that if you make if you manage risk then you're going to make money, but you can keep yourself in the game long enough and not do damage to your capital whilst you're developing the other skills. Okay? So it is the most important uh one of the one of if not the most important um factors that you need to learn. So that's why we're going to cover it in this session.

So as I say risk is the most important factor in becoming a consistently profitable trader. Without proper risk controls you risk blowing your account. And as I say if you blow your account you end your trading journey. You cannot make money from the financial markets without money yourself. Okay?

Even if you're going down sort of like prop firm routes where you know you need a limited amount of capital, you still need capital to be able to buy the challenges to pass the prop firm um prop firm challenges to to to get funded. Okay. So you do you cannot make money without having money in the financial market. So you have to be able to manage your risk and protect your capital.

And this is why we must stay risk focused not profit focused. We we focus on the risk. We focus on protecting our capital and then the profits will take care of themselves. Okay, your success will depend and will be defined your career as a trader will be defined on how well you manage your risk. And the reason is is like draw downs are part and parcel of trading. Okay, they are inevitable in trading.

So risk must protect your capital at all times even through those draw down periods. We don't know when those draw down periods are coming. So we must manage our risk so that our capital is protected at all times and we need to view risk uh as a percentage of our current account uh trading our current trading account capital. Okay.

So understanding risk, your trade plan, and we're going to talk about trade plans shortly, should clearly define how much you're going to risk on your strategy on each individual trade. And re your risk should be predetermined.

You shouldn't be guessing when you're entering the trade. It shouldn't be going on a gut feel on how you feel. You shouldn't be thinking about how much you should be risking when it comes to executing the trade. That should all be predetermined. You should know that. It should be automatic. Okay? So, I recommend risking somewhere between 0.1% and 2% per trade.

Um, and depending on or or trying to determine where you are on this scale, it's somewhere in between. Uh, it should be based on a variety of factors. And this is your own individual risk tolerance. Everyone has um a different appetite for risk um and a different basically a different level at at where they are going to become emotionally impacted in their decision making by the amount that they're risking.

So some people who are happy and more comfortable taking on risk will um be able to risk more per trade and still not feel heightened emotions when going through draw down periods or uh or going through a draw down within an individual trade.

Whereas some people can um feel those emotions even on very small amounts um and therefore as soon as they start feeling emotional this impacts their decision-m and that can be detrimental. So your risk tolerance can impact how much you should be risking per trade. The amount of capital that you have at your uh uh at your um available to you will also determine that.

Your goals from trading, you know, whether you want to um supplement in income, whether you just want to whether you're looking for a long-term horizon almost like uh to for a pension or whether you want to um actually create an an income from it as well. Also, one of the big ones which we're going to talk about in a moment is your trade frequency.

Okay, so how often you are trading uh as well as your expected win rate and risk-to-reward ratios. Okay, so again um somebody with a high win rate um and uh lower risk-to-reward ratios may be able to risk a little bit more because their draw down periods are going to be much and their the variance on their account is going to be much lower.

Whereas somebody with a low win rate, with a high risk-to-reward, you're going to get these big wins, but you're going to go through long extended periods of draw down. So, you need to to to risk smaller amounts to be able to protect one your capital in your account, but also protect yourself from emotional decision-m.

If you go through uh if you have a really low win rate uh strategy, that doesn't mean to say that you don't have an edge, that doesn't mean to say that it's uh better or worse than a high win rate strategy. Okay? I know a lot of traders, a lot of very successful traders who only have hit rates of sort of 20 to 30%, but they have high risk to rewards and they can be extremely extremely profitable traders as well.

So, it's not saying that one is right and one is wrong, but being aware of this and being aware how that's going to impact your decision- making and how that's going to impact you emotionally to be able to sit through extended draw down periods with that and and continue to follow the system and to continue to follow the plan to allow the edge to play out.

That is another factor that you need to consider when determining how much you're going to risk per trade. Okay, so we're going to talk about the style, your style of trading and how this is going to impact your risk. So, how often you trade will directly impact how much you risk per trade um and what is appropriate.

So, if you are a scalper um or a high frequency trader where you're maybe trading, you know, five to maybe up to even up to 20 times per day, you may require to trade just as little as what 0.1 maximum 0.5 risk on any one individual trade. You want to be on that lower end because again if we just think about it if you're trading just say for example 10 to 15 times a day on average and we're risking 1% per trade.

If you have a bad day or the market moves against you you know we have some sort of black swan event where the market just goes through levels lots of slippage and the market is really like a COVID or a um you know a Brexit or something like that. you know, you can you're you're going to do a lot of damage to your account in a very short space of time. You're not going to be able to react to it.

You're not going to be able to sit back and have any sort of rational thought process. It's going to be like you can you can put 10 15 as much as 20% of your account at risk in any one individual session, which is way way too much.

So by reducing that to just like 0.1 to 0.5% you're actually reducing your total exposure over the course of one session to just maybe sort two to 3% which is ideal maybe maximum of like four to 5% in any one individual session. So that if the market goes against you, if you are feeling off, you have time to look, reassess, rationalize, and step away before you then make another um more damage in the next session.

Uh day traders, this is where you trade most sessions, um but maybe not every single session, but you may also trade a couple of times in each session. Um this is where you probably do want to be trading like 0.5 to 1% risk per trade. And this is when you are trading that sort of 15 to 20 time 25 times a month something like that.

You then have intraday and day swing traders where you're trading from maybe the 1 to 4 hour charts. Uh typically suits 1% risk per trade. And again you're somewhere between 10 to 15 to 20 trades uh over the course of a month when when you're when you're trading this style of trading.

And then finally, uh, you've got swing position trading where you may be taking just a handful of trades a month, um, but you're going to be holding them longer.

And when this is the case, if you can just if you can, um, justify that you and and prove that you have uh, discipline in your risk and you understand uh, the markets and you can go through draw down period, you've got the edge in the the proven edge in your strategy, you know, maybe up to about 2% risk per trade uh, in this sort of style of trading.

It's also really important that we keep our risk consistent in terms of the percentage of our capital in any one particular trade. So for example, if our plan says we risk 1% per trade, we must always risk that amount. Now a lot of traders fail here because they adjust their risk based on emotions to either chase losses or become complacent when they go on good winning streaks.

And all they're doing is they're randomizing their their edge. Okay? So trading is about probabilities. The distribution of winners versus losers is completely random. If we knew when if we have a 60% hit rate, you know, we know 60 out of 100 trades are going to win. 40 out of 100 trades are going to lose.

Now, if we knew when the 60 winners were coming, we just wouldn't trade the losers and would would go big on the winners. But we don't know. So we need to keep it consistent so that our edge is allowed to play out over the time. And as I say, if you randomize your risk, you're randomizing your edge because you could end up taking bigger losses on some of those winners.

Um, and therefore you're you're take eroding your edge and eroding your profit potential from those trades. So um the there's a really good book called Trading in the Zone by Mark Douglas. It's a bit of a staple for anyone who really wants to get into trading. Highly recommend uh reading it.

Um and uh it will it will um really elaborate and confirm and give more information around viewing the markets and viewing trading in terms of probabilities. Um it's a fairly easy read. It's not too complex. It's not too it it's a it's a it's a nice read. So as I say it's not too technical, but it really gives a good impression. So look, this is the first session on risk.

As I say, it's vital that you manage or learn to manage risk from the outset. You need to, it's vital that you understand yourself. It's vital that you understand what you're trying to achieve from trading. It's vital to understand what style of trader you're going to be and how you need to adjust your risk based on that. And hopefully this can give you some guidelines to start you off on that journey.