Fixed risk: why you cannot trade using the same risk in all deals
This short example shows how you are losing money because of subjective, not market, reasons.
In our previous blogposts, we’ve discussed the nuances of risk management in details. The most part of the market players does not use them: they trade according to the principle “to lose as much as you can afford”. Let us see why this does not work, well, or it works, but it brings to the loss of funds.
So, the trader opens a position, doesn’t calculate the risk in advance neither in currency nor in a percentage.
The order of actions usually looks like this:
- to determine “how much money you can afford to lose” or how much is not scary to lose “just in case”;
- to recount, according to the distance is in the currency pair;
- find out where to set a stop.
Why using this strategy you will sooner or later lose your deposit
Three traders, each one has a $1000 deposit:
- Colin is conservative, he’s ready to risk $20 per deal;
- Nathan — $50;
- Mike is an aggressive player, he risks $100.
They all follow the rules of risk management and have 10 profitable and 10 losing trades.
The lifelines of their trading accounts, as a result, look like this:
- Colin has a 20% profit;
- Nathan is has a greater loss than Colin, but in the end, receives a 50% profit;
- Mike loses his funds.
This short post about cryptocurrency trading: mathematics, not a roulette. Please count, and do not count on luck.
For those who like it, we have two rules of money and risk management: an easy one, and for those who want to level up. Check it out: