The Ultimate Risk Management Strategy for Profitable Trading

Risking €2,000 to earn thousands of euros. Is it worth it to you if you choose such a path? You only ever have one thing under control, and that's your risk. And to show you that today, and to stop this myth that you need high hit rates, I have a few example trades with me, and I want to look at a platform with you. At what point does it even make sense to enter such trades? In this video, I'll show you exactly what the risk-reward really is. Why you stay in the black even though you lose more often than you win in your trades, and how I personally deal with such challenges so that I have no emotional stress. Look, I'm going to present a trade example to you now, and then I want to go through the math, the mathematical variance behind it with you, how long this trade has to run. And the truth, where was the stop loss at the beginning? And that's exactly what we're going to look at together now. Here, for example, is a trade in the DAX future where you can see, oh, it's already quite far in profit. That means everything looks great, but the truth is, when I entered the trade here, my stop loss was above here. And now let's record this key figure together. That means, if we're honest with ourselves, stop loss 26,491, trade entry 26,444. The stop-loss size is 47 points. Many say, wow, how can you choose such a large stop-loss? I'm telling you, you can do that if you're planning a trade for a big swing. That means for a long distance? Now I have a stop-loss size, but what am I missing to smartly know where this trade has to go so that I even theoretically earn money mathematically? Now comes the next thing. Over many trades, we have analyzed these swing trading models for ourselves, and this model here has a hit rate of 40%. I don't win more often than that with this type of trading. That means I know my hit rate, and I know my stop-loss size. But what I don't know is, how far does this trade have to run? How many points do I have to calculate at least to earn money in the long run? And for that, I'd like to introduce a nice simulation platform to you so that you start, if you feel like it, to deal with it. Because afterwards, such trades always look super cool, but that's just the truth. And the truth is, if you do long swing trades, it can of course always happen on the way down that the market at some point Well, no longer does what it should and runs back and stops you out. The next thing you see here is that the stop loss has been adjusted. Well, why? Because from here it would very likely establish a long trade. I'd never want to let the market run higher than this price level and give it some room, as I know this market and the DAX is just very volatile. And you have to be able to factor all that in when you choose such a strategy. But now let's go and take a look. With a win rate of 40%, how far does the position have to run for me to even have a mathematical advantage? Let's assume, with this wonderful equity curve simulator, which can be helpful if you use it correctly, you want to see if you have a theoretical account of €100,000, And a win rate of 40%, what kind of risk-reward ratio do I need to even make money? And now we're approaching the whole thing, because it's much more fun than just giving you the mathematical formula, which I certainly know. But now you also have to know how many trades are even necessary to have verifiable numbers. And I always claim that you have to have done at least 300 to have a variance that is mathematically valuable. And now we say, and we'll get to that later, how much risk per trade can you actually take? Now let's say we take a 1% risk per trade and start the simulation. And now we see here, and this is the crucial part, the risk-reward ratio is 1:1. Of course, we lose money then with a 40% win rate. Let's set the ratio to 2:1, and whoops, suddenly you start making money. Let's use this black line here, which shows us the average course, and see what is my maximum drawdown. I already see 21.8% there. That means 21.8%. Now I have to ask myself, am I really, truly willing to accept that figure as a total absolute drawdown on my portfolio? It is a serious question. And now I want to tell you something else that is absolutely vital. When you're relying on these kinds of mathematical theoretical models, please, I urge you, always double the drawdown suggested by the theoretical value. You need that extra buffer because reality is rarely as clean as the math suggests. It is just the safer, smarter way to operate. What do I mean by that? Before we get back into it, a quick notice. World Class Edge just launched, and if you want to know How really institutional traders and market makers actually trade? Click the link below and secure your spot at World Class Edge. All right, back to it. If you go and use something like this here to determine for yourself what is realistic, then you will realize that while it's mathematically sound for now, the probability that the market might give you a larger drawdown after all. because things occur that you don't plan for, is definitely there. That means we're doubling the drawdown now to a rounded 40%. 40% drawdown, I'm telling you, that must never happen! With a 40% drawdown on your capital, if you keep taking a 1% risk per trade, you'll need a lot of ground to get back to zero. What do I mean by that again? Look, if, for example, as we just established, you could reach a theoretical drawdown of 40% with your strategy, then you already have to earn 66% just to get back to zero. Why? Because if you take a 1% risk per trade, on €100,000, that would be €1,000. But if you now have a drawdown of 40%, then you only have €60,000 left. That means you can only risk €600 per trade. And if you only risk €600 per trade, it takes you significantly longer than with €1,000 to get back to zero. And many people don't realize that. So absolutely everything you build in summation with any process must never mathematically contain more than a 20% drawdown, because then you already need 25%. But the curve, the higher the drawdown gets, rises exponentially in terms of what you ultimately have to achieve to get back to zero. If this bores you, that's fine, but do you really stick to it? Look at it, and please, please follow these guidelines. So let's go back there. We just established that 40% is way too much, and with 1% per trade, we could reach that drawdown. Here it is. So let's say 0.5% risk per trade is the maximum that should happen. And now you can already see here, 11.8% is now the maximum drawdown when you start the simulation. You will of course earn less money because you're also staking less, but mathematically you're now on the winning track. So now we come to the next point: at what risk-reward ratio will you even earn positive money At all. And here too, let's play further so you get an idea of how to approach it if you don't just use a mathematical formula. Let's go to 1.7. And at 1.7, we already see, yes, it's just barely positive, but mathematically, there are also variances that say it's no longer positive. Let's go to 1.8 and see, even there, there are still dips into the negative. That means, with my risk-reward ratio of 2, I'm really at the absolute lowest point that we're allowed to reach. So let's go back to our trade and take a plausible look at the whole thing. This means we now know the following: position size maximum 0.5% of my account balance. Now the first question is, does the contract, in this case DAX Future, Really fit my account. 0.5% risk on a €100,000 account would be €500. That means with an account size like that, I shouldn't be trading this at all. That's very important to know. And I could calculate it for you now, but in the end, it's a very simple calculation. If I add the slippage to 47 points, I'd have €1,250 of risk per contract at 50 points. That means times two contracts, that's already two and a half thousand euros of risk. Can you really expect your account to handle that? You have to locate that and calculate it. But we want to know: Is this trade even feasible in any way? And now let's say we have fifty points of risk because we've factored in slippage, because we know that the DAX future often has spikes. And then doesn't execute the stop loss at the price we want. And we say if we have a risk-reward ratio of at least 2 to 1, that means our profit run must be at least 100 points from entry. And that would be right here. And now you see the market has only just reached the level here. That means the market often takes a while, and if it takes a while, it's always possible that it might turn around. And now I've trailed the stop loss. Is that even mathematically smart? No, it isn't. But if you go about it, for example, the way we like to do it, then you just proceed as follows: you sell after this stretch here, 2 contracts, for example, and thus you've taken care of your mathematical variance. And the other 2, they're actually supposed to run much, much further and earn you a multiple of what's already been earned. And now you could say, but it's still not mathematically smart. You're right, and you're not, because if you use a strategy that maybe has several variances because you're very experienced, then you know for the second strategy where I claim I want to catch the extension on a trend day in the DAX, I'll reach around 300 points. In-profit run. And I have a hit rate of only 30%. That is, of course, catastrophically low, but mathematically a huge deal when a trade like that goes through. And I want to show you another trade here where we did exactly that. And look, here is the other trade now, and this trade has reached 680 ticks by now. The risk was up here that the market would run down here was at 30%, and then it even kept going and we let it run. Yes, why? Because we knew there was a trend day, and a trend day is a day where the market has a much higher expansion and a much higher trading range than on normal days. And on a day like that, you can expect 400, 500, or 600 points. And that is exactly what you do then. And then you move your stop loss at some point when it is smart to a price range where we expect the opposite movement. And you have to calculate your risk-reward ratio based on this price range. And then it is not, as it says here, wow, 680 points, but rather just a good 500. And now you have to see, does that fit with my initial stop loss of over 100 points? And with a hit rate of 30%, a 100-point stop, and a 500-point profit, do I still have mathematical variance on my side? Yes, I do. And that is why trades like that make sense. But they are, of course, much more likely to be stopped out. And so these are ways that can always be used in line with your key figures for your strategy. And this tool here is very nice to just play around with and not have too much static math, because you get results that are rounded and okay to record the whole thing for yourself. And so I want to tell you, it is not about the hit rate. It depends on whether you adjust the position size to your strategy, and perhaps also the lower hit rates, so that your entire account never gets into trouble, And you do not get out of balance if you have many more consecutive losing trades with low hit rates. That is the math behind trading, and I hope you enjoyed seeing that sometimes less is more. And with a few swing trades, where it obviously takes much longer to make a lot of money, you can still have much less stress and get much more money out of the market. I thank you for your time.