3 PROVEN Ways To Avoid RISK OF RUIN (Risk Management Trading) 🔥🔥


– Welcome to the video series on Money Management In Trading. In this series, I
will be covering money management
and risk management in great depth. In this particular part,
I will be discussing one of the most important
concepts in money management, that is importance of
knowing risk of ruin. After finishing this part, you will have a
good understanding of how not to lose
your entire capital while trading. So lets get started. This entire series
about money management and risk management is
structured in such a way that you can understand
the importance of capital preservation while maximizing your profits. Now, many beginners who
come to the stock market do not understand the importance of money management in success, and therefore I have
dedicated an entire series towards this topic. So, in case you are
one of those traders who has lost money in the market this is the concept
which will help you understand why you have
lost money till now. I’ve also suggested
three solutions for you so that you can implement
this in your own trading and eliminate the risk of ruin in your own trading account. Now, calculating risk
of ruin is pretty simple and I have shared the
formula in the video, but in case you are not
familiar with Microsoft Excel, then do let me know in
the comment section below and I will email the
Excel sheet to you. So risk of ruin is perhaps the most important
concept in trading that is not spoken
about that often. This is one concept
that every trader should be aware of and
yet I find very few books and tutorials mention this
on a consistent basis. So this is precisely why
this is the first topic I will cover in this Money
Management In Trading series. The reason why risk of
ruin is so important is because it will
help you understand why you have lost
money till now. In simple terms, risk of ruin is a statistical measure
that tells a trader the odds of losing so much money which will eventually
lead one to stop trading. Now do note here
that risk of ruin does not mean losing
100% of capital. For some of traders
it will just mean losing 50% or even
60% of capital. Now this varies from
trader to trader and this mainly depends
on risk tolerance level. Now, there are couple
of ways to calculate risk of ruin and
this is something we will cover in
subsequent slides. Let me first show you one
of the most effective ways to quickly determine
risk of ruin and then to make necessary
changes to avoid it. The formula to
calculate risk of ruin is given in front of you. In this formula, W stands
for winning percentage, L stands for losing percentage, and N is the units of money in trading account. So W and L are wining
and losing Percentage of your own trading strategy. The most simple way
to determine this is to refer to
historical back test data of your own trading strategy. Now I’ll recommend
for you to analyze at least three years of
historical back test data to determine the stats
for winning percentage and losing percentage. Let me now explain
what N stands for. So let us assume your
account size is of 100,000 and you decide to
risk 5,000 per trade. N would then be
calculated as account size divided by risk per trade. So in this case value
of N would be 20. Let me now take another example to understand risk of
ruin calculation better. In this example, I have
taken a trading strategy which has winning
percentage of 56% and 44% is the
losing percentage. Since account size is 100,000 and risk per trade is 5,000, there are 20 units of money
available for trading. If you take these values
and put it in this formula risk of ruin would
come about at 1%. As a trader, you should
aim for risk of ruin to be as closer to
zero as possible. In my own experience I’ve found that reading above 4% does not work in the long run. Now that you’ve understood
the basics of risk of ruin, let me now show
you three main ways that you can aim for
your own risk of ruin to be as close to
zero as possible. The first way to
avoid risk of ruin is to reduce the size
of risk taken per trade. In this chart, I have
taken six traders who trade with the same system which has winning
probability of 45% and losing probability of 55%. Each trader, if you
see, has account size of 100,000 but risk
per trade is different due to their own risk profile. Trader one, if you see, has two units of
money available, followed by Trader two,
three, four, five, and six who have five units,
10 units, 15 units, 20 units, and 25
units respectively. Do remember here that unit
of money is calculated by dividing the account size
by risk taken per trade. Based on how much each
trader risks per trade, Trader one has 67% odds of losing all of his money. Trader two and Trader three have 36% and 14% odds of same. Now do take a look at
Trader four, five and six, each of these traders
have just 5%, 2% and 1% odds of losing
entire capital. The main reason for this
is that they are risking limited amount of
money per trade, which in turn is helping them to preserve their capital
over the long term. At this stage of your
life, if you are someone who is repeatedly
losing lot of money, then begin by reducing
risk per trade right away. See at this stage you
have to understand that your number one priority is not to make
money in the market. If you are beginning
in stock market, then your number one
priority has to be to always protect your capital. Now even after
having some amount of experience in market, my number one rule in trading is to always look
after my capital. I’m never bothered
about profits, I’m never bothered
about losses. The number one priority for
me when I get up each day is to protect my
capital at all costs. The second way to
avoid risk of ruin is to trade a trading strategy that has high odds of success. In this chart, all
traders that you see here have account size of 100,000 and all are risking
10,000 per trade. Unit of money available
to each trader is 10. That is account size
divided by risk per trade. Based on this chart,
Trader one trades with a trading strategy
that has 51% win ratio. If you look at risk
of ruin for Trader one it stands at 67%. Similarly for Trader two,
with win ratio of 53%, risk of ruin stands at 30%. Now take a look at Trader
five and Trader six. With win ratio of 60% and 65%, their odds of risk of ruin is just 1.7% and 0.2%. So as win ratio of a
trading strategy improves, it is less likely for a trader to lose his capital. I hope this point is clear. At this stage, do
compute win ratio of your own trading strategy, and in case your win
ratio is less than 50%, then either shift to a
strategy with high win ratio or start reducing
your risk per trade so that you can sustain for a longer time in the market. So till now you know
how to calculate risk of ruin based
on win-loss ratio and units of money available. Let me now show you how
to calculate risk of ruin based on capital and
maximum draw down of a system till date. So do note here that
maximum draw down is the maximum loss from
high to low in a portfolio and this remains a key metric to track in risk management. The formula to
calculate risk of ruin is given in front of you where W stands for
winning percentage, L stands for losing percentage, and N is defined
as total capital divided by maximum
draw down till date. Now this way of
calculating risk of ruin is also good as this
takes into account your win-loss ratio along
with the capital available and draw down based on
your own trading strategy. In this example,
win ratio is at 53%, and loss ratio is at 47%. Total capital under
consideration is 50,000 with maximum draw down
till date of 5,000. So the value of N in this case is 50,000 divided by 5,000, that is 10. Now when you put
all these values in the formula given here, risk of ruin percentage
comes out to be 30%. So at this stage
I hope you can see why recording all your trades is so important in stock market. Unless you get into the
habit of documenting all your trades in a journal, you will never be
able to compute risk of ruin metrics. The main reason for this is
you will require statistics on winning percentage,
losing percentage, and maximum draw down of
your own trading strategy. So my recommendation
for you will be to document every trade
that you take in detail. Now the third way to
avoid risk of ruin is to trade a strategy
that has limited draw down. In this example, all
traders are trading a different strategy
that has win ratio of 51% and capital for each
trader is at 50,000. Trader one has a maximum
draw down of 5,000 till date and his risk of
ruin stands at 67%. Trader two, if you see, has
maximum draw down of 4,000 and his risk of
ruin stands at 61%. Similarly for Trader
three, four and five, risk of ruin stands
at 51%, 37% and 14%. Now take a look at
Trader six here. Trader six has a
maximum draw down of 500 and therefore his risk
of ruin is at 2% only. So in this particular example, as amount of draw
down decreases, odds of risk of
ruin also decreases. Now as a trader, you can have
maximum draw down of 5,000 and still lower your
risk of ruin below 2%. For this to happen
though, your win ratio would have to be closer to 60%. I hope you can
see how win ratio, risk per trade and draw down impact the risk of
ruin for a system. Your aim here has to be
to use a trading strategy that finds a balance
between all these variables that we have discussed. This way, you will
reduce your odds of risk of ruin drastically. So let me now explain
how you should be proceeding forward from here. Now that you understood the
concepts of risk of ruin you should now
calculate risk of ruin for your own trading strategy. For this you will
require win-loss ratio, risk per trade, and the
draw down statistics. In case you do not have the same I would strongly
recommend for you to test at least
three years of data. Your entire focus here should be to bring your risk
of ruin below 2%. Now, once you’ve
computed your results in case you need
feedback about the same, then do let me know in
the comment section below.

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