We'll help you map out a plan to fix the problems in your trading and get you to the next level. Answer a few questions on our application and then choose a time that works for you.
BOOK YOUR FREE STRATEGY SESSION NOW >>Every trader knows that money management is fundamental to be able to continue to trade on the markets in the long term.
The amount of capital invested in each trade must be carefully chosen, because not only profits generated in case of a win, but also losses in case of a loss will depend on this amount.
In this interview with Radio 24 journalist Debora Rosciani (Sole 24 Ore group, which includes the main financial newspaper in Italy), we're going to talk about money management in trading and the clichés that surround the concept of "risk-reward ratio".
Here are some of the topics we’re going to discuss in the interview:
- the right percentage of capital to invest in your trades to avoid overexposure
- why the ideal risk-reward ratio isn't always 1:3
- why it isn't always true that the more you risk, the more you earn
Enjoy the video! 😎
Is trading very risky? We’re going to talk about it with four-time world trading champion Andrea Unger.
Welcome back! We're meeting today on this digital stage to talk about trading. So, what is the scope of our chat with today's guest? The scope is to steer the listener away from the false myths about trading and towards the so-called systematic method.
What do people who approach the world of trading for the first time ask themselves? In other words, what do they expect?
So many questions are asked. For example, does trading really mean doing risky and speculative operations? And also, is trading only for shrewd traders capable of tolerating even very high risks? And also, does trading mean sitting in front of a platform and doing dozens and dozens of trades per minute?
The truth is that these are false beliefs and distorted information that, by the way, often lead many people to rely on non-professional traders – or even real crooks - to perform trading transactions.
As in all professional fields, obviously everything depends on the level of expertise. Today, we're going to focus on the systematic trading method, a method that enables us to make preliminary and upstream evaluations.
The question is why do we need to do this work? Why do we need to use this method? Well, as we said previously, trading is generally perceived by the masses in two ways: a scam or a quick and easy way to make money, and neither of the two versions is true.
The tools to operate in a professional manner in this field, removing the wrong or distorted information that often influences it, are provided by Andrea Unger, the only person to have won 4 times the World Trading Championship in the Futures category. Andrea, welcome back!
Thanks Debora, nice to see you again and hello everyone.
Let's talk about money available for trading. If I invest €500, because that's what I have on hand, so I risk 100% of that amount, does this mean that I'm doing trading?
Well no, the operation is trading but you're playing at the lottery, you're making a bet... Which is fine if you know what you're doing. But you aren't trading, you're risking everything you have available for that type of operation, so you're making a pure bet. If it goes wrong, you lose everything. If it goes right, who knows. It's fine if you’re aware of what you're doing, but don't think you can build a career as a trader this way because what you put in trading is the available capital, and with that money you have to open positions that are measured on the highest amount of that capital that you’re willing to lose.
Usually, I am speaking in general terms, a 2% per transaction is already a good amount... and then I mean, it's a generic amount, it isn't a recommendation, also because it depends on the risk profile of each person. But already over 2% per transaction starts to be a lot. And it seems stupid, because one says "But it's 2%", but it isn't stupid because there are many loss-making operations. That's 2, 4, 6, 8 and so on, and in the end the money is no longer there.
So, if you enter into operations where you' re risking more than 2% of your capital, you're already risking a lot. Then, you’re free to do whatever you want if you believe in what you’re doing, because you say "I don't care, I want to risk 5%. I know the risk that I'm taking and I'm fine". You're free to do that! But 2% is a kind of barrier above which you start to be very aggressive. Then if you have only one strategy, you'll work only with that strategy and say, "Yes, I have only this one and I'll make 3%" is okay, but usually you want to diversify, to work on several markets, make several operations… and already by risking 2% on each of them you start to be aggressive. So having a parameter like that... You know, it's a 2% capital loss, which isn’t the standard 2% stop loss on the operation. People sometimes confuse them, because that would mean putting all the capital into the trade, and at that point, the 2% stop corresponds to a 2% loss.
I may divide the capital into 5 different securities. I'll lose a percentage of each one, for example 0.4% in this case, I don't know... or 8, or 10 for example, depending on what you're interested in, and the amount lost in that operation with that invested capital must not exceed 2% of all the capital allocated to the investment, to trading in general....
Many people put even less capital in the account and say "yes, but I pretend to have more because I have it in the bank". That's all well and good, but I assure you that stomach aches are less bearable when you see that the capital has been depleted. It's always better not to make too many complex assumptions. Do you want to dedicate €10,000 to trading? Ok, you’ll deposit €10,000 in your bank account, in the broker’s account or whoever’s, and then from that moment on you’re ready.
Another important aspect to consider when testing the validity of the investment made, regardless of its type, is the need to make a correct assessment of the risk-return ratio. Maybe an investment instrument has a good yield, a good profit, a good return, but you have to determine what relationship it has with the risk that's taken. In the world of trading, what is the value of this relationship, namely the risk-return ratio? How do you explain it? How should you reason on this specific aspect?
Now, there are really different kinds of issues. One is a cliché, where we often talk about a return 3 times the risk, which is a pure cliché because there are very good strategies where the return is half the risk taken per operation. The other cliché is "the more you risk, the more you’ll earn".
So, let's start from the first issue: the risk-return ratio depends on the type of strategy you're using. If I use a strategy that follows a medium-long term trend, in all probability, you'll make many attempts to enter in the operation, attempts that maybe you'll immediately interrupt when it doesn't go as it should, until you find the right path. It's kind of like taking the train...the subway maybe better...and then realizing you've made a mistake and you get off at the first station and then you pick up and then you get off again, and then you finally get on the right line and go to the destination you want. It's clear that all these small losses have a small risk because they are small losses, and the return, when I find the big deal, will be big. So, in this case you've got a return to risk ratio of maybe 10 to 1 and that's fine.
The problem is that there are so many small losses, so before I get that nice 10 trade right, I'll lose many times maybe 1. Maybe I'll even get to 5 or 6. So, in the end, however, the final ratio between total gains and total losses will not be 10 to 1. It would be nice if it was, but it will be very different.
Then there are strategies that instead work for example on rebounds, when there is a market crash and someone identifies a point in which it seems logical to buy. In order to exploit these strategies in the best way possible, and I speak as a systematic trader in this case, the exit value in case of loss, namely the stop loss, must be wide enough because you have to leave space for the market to move. On the other hand, the exit often (you catch the rebound) is narrower than the stop.
The fact is that even if you gain less than what you’re risking in that single operation, such a strategy, if well built, and I repeat "if well built", often has a much higher number of winning operations than losing operations. And then, at that point, even if when you lose, you lose 10 and when you gain, you gain 2, you'll gain so many times that at the end the total gain will be higher.
But these are two completely different strategies, with an opposite risk-return ratio, both very acceptable. So, the 3 to 1 ratio cliché doesn't make any sense. Sometimes it is sold by some last-minute trainer who.... has finished peeing in bed yesterday and now wants to do... well, it's just a digression because I see many amateurs who may be very good at it, for God's sake, but......
The other issue is that of increased risk and increased return. It's true, namely, it's generally true that the riskier an asset is, the higher the overall return will be. If not, I'd be a fool to buy something very risky to earn little, right? However, at risk level, if you refer to a single strategy, there is a level beyond which it is not convenient to go. I don't want to get into mathematical calculations now, but this is mathematically calculable based on the historical trades. But there is a level beyond which if you risk more, you’re actually worsening your performance. At that point, if you were able to avoid this level, you’d know that it isn’t worth going beyond that risk. So, it isn't true that this equation goes on forever. You risk more and potentially gain more up to a certain level. That's why in certain cases if you risk too much, and in any case, it's not worth it because the return would not justify it anyway.
The example that you made before of your €500 that you invest by risking all of it is clearly wrong because, yes, it could go well for you 1 time or maybe 2 times, but once it goes wrong, you're done, you've finished trading, you've finished all your money. This is an extreme example, but it's the same story. You're risking 100%, you can earn a lot, but if it goes wrong, you're finished, you can't do anything else. Instead, you should think in another perspective, if not of a professional nature, at least in a medium-long term availability of money to manage the capital.
Before we say goodbye, here's a last service announcement. For all the people who'd like to delve deeper into the concepts we have explored during our conversation, you can order Andrea Unger's book, "The Unger Method," which is available on the Unger Academy website. You'll receive the book at your doorstep. It's free, and you only cover the shipping costs: so happy reading, everybody!
We'll help you map out a plan to fix the problems in your trading and get you to the next level. Answer a few questions on our application and then choose a time that works for you.
BOOK YOUR FREE STRATEGY SESSION NOW >>Andrea Unger here and I help retail traders to improve their trading, scientifically. I went from being a cog in the machine in a multinational company to the only 4-Time World Trading Champion in a little more than 10 years.
I've been a professional trader since 2001 and in 2008 I became World Champion using just 4 automated trading systems.
In 2015 I founded Unger Academy, where I teach my method of developing effecting trading strategies: a scientific, replicable and universal method, based on numbers and statistics, not hunches, which led me and my students to become Champions again and again.
Now I'm here to help you learn how to develop your own strategies, autonomously. This channel will help you improve your trading, know the markets better, and apply the scientific method to financial markets.
Becoming a trader is harder than you think, but if you have passion, will, and sufficient capital, you'll learn how to code and develop effective strategies, manage risk, and diversify a portfolio of trading systems to greatly improve your chances of becoming successful.
