Why Newbie Traders Lose money? | Risk Management Basics

[teosanru]

Most of the people think that Trading is merely learning to read charts and then buying low and selling High. But that is absolutely wrong! This is the main reason why certain newbie Traders don't make money. I would tell you a secret which most of the Trade gurus don't tell you while they teach you trading. first of all to understand the Importance of Risk Management I would like you to go see this Post of Mine:

https://bitcointalk.org/index.php?topic=5199458.msg53013312#msg53013312

Now going through the basics. I would teach you how to learn basics of Risk Management and you will learn how to do a disciplined trading.

STEP 1: Understanding Risk to Reward Ratio
Risk to Reward Ratio is the most solid strategy provided by Risk Management Theory. It is called Risk to Reward but actually is Reward to Risk Ratio It basically is a ration which is developed by this formula

Profit you can earn per trade(Difference from Target to Entry)
_________________________________________________
Risk you take per trade (Difference from Stop Loss to Entry)

This means for example if you take a trade at $10000 and your pattern says a target of $10200 and stop loss at $9900. Now feeding in the values in formula:

$10200-$10000             $200         2
____________      =     __________   =   _ = 2:1
$10000-$9900               $100         1

This signifies that there is double the profit potential than the assessed Risk. Now Ideally people would say that 2:1 is the best ratio but I think it should be the minimum atleast until you become an intermediate trader who can have control on his emotions. How this is important? I would quote my own post:

I think a very important concept pretty dear to my heart which you really forgot is Risk Management. I consider 80% of success in Trading comes with Risk Management. If you can limit the amount of risk in every trade to maximize your return. You just don't need any guidance in selecting your trades. Because if you are trading even with a 60% win strategy a good risk management technique can increase the returns upto 80% because it teaches you how to earn greater from the trades you win and lose less from trades you lose by setting a favourable Risk to Reward Ratio. Let's consider an example to understand this.


Case 1: 60% win ratio with 1:2 Risk Reward
You take a Risk to Reward Ration of 1:2 which means you Buy at 9000 and set your target at 9200 but keep your Stop Loss at 8900. Which means maximum loss is $100 but max profit is $200. Now if you keep this ratio over a period of say 100 Trades.

Now Assuming you get profitable in 60 trades which means you earn 60x200 which is $12000 and you lose 40x100 which means $4000. Your net gain still is $8000.


Case 2: 80% win ratio with 1:2 Risk Reward
You take a Risk to Reward Ration of 1:2 which means you Buy at 9000 and set your target at 9100 but keep your Stop Loss at 8800. Which means maximum loss is $200 but max profit is $100. Now if you keep this ratio over a period of say 100 Trades.

Now Assuming you get profitable in 80 trades which means you earn 80x100 which is $8000 and you lose 20x200 which means $4000. Your net gain still is just $4000 with a better strategy.
This is why people say that it's better to have a better Risk Management strategy.

STEP 2: Understanding Power of Compounding
What most traders forget is that aim is to be profitable in long term and earn money and not to just hit a good trade today. So bring the power of compounding in your play. Set small daily targets like 2%-3%. This might seem small but no matter what is your account size this is the only way to earn profits.

Have a look: If you have an account size of $1000 and earn just 2% daily. Trust me it might seem very easy but it isn't that easy to earn 2% consistently unless you keenly apply Risk management. Now,

Earning 2% for merely 100 days would make your capital like:    1000 x (1+0.02)¹⁰⁰ .
The answer would be $7376. This means you would make 7 times of your capital merely by earning 2% daily for 100 days. [People think that compounding is only a long term concept but truth is it can be applied to short term trading too.

STEP 3: Don't Risk everything in one day
You are fighting a war against the world and not merely a battle. A true warrior doesn't gets exhausted in one battle because he is here to fight a war. So never ever risk more than 3% of your capital in a day. Now you have to determine what is risking your capital. we have studies in step 1 that maintain a risk to reward ration so this risk ratio should be something in numeric terms say for example taking example taken in step 1 Risk was of $100. Now if your total capital was $20000. You are risking 0.5% in a trade which is way below the risk cap of 3%
$100
______  =  0.5%
$20000
So no matter how much capital you use in a trade but the risk per trade should never ever exceed what is the maximum risk cap.


These are basic 3 steps towards risk management. If you have any questions I would love to answer them. I would even have a FAQ below this thread about whatever major questions everyone is getting. Moreover I would love to come up with Part-2 of this thread where I would teach some intermediate principles. Stay tuned and I would love seek opinions of anyone who are not in agreement with these points.

[shield132]

Are you one of that "Trade Gurus" and decided to reveal the secret?
Well, I appreciate what you wrote, don't take it wrongly but please can you answer me on one question? When you profit, it means someone loses yeah? So in any way someone has to lose, doesn't matter how experienced these traders are, one can't profit without another ones' lose.
And what about to forget targets? I think you can't plan economy because your plan of daily 3% may ruin chance of getting 10% profit or you even won't reach your target so this means your plans failed? And some may start digging to get that planned profit next day combined with tomorrow's plan and it will ruin everything, especially when we talk about newbies.

[Strongkored]

After read in Step 2 : Understanding power of compounding, the calculation are vey interesting and will definitely make traders interested in this, but remember that even trader do trade with large capital and make daily profit target small, this is still not easy to always get profits in trading. In my opinion the power of compounding only suitable in shares investment that will certainly provide devidens, long term investment or anykind of investment that give fixed profit.

[teosanru]

Are you one of that "Trade Gurus" and decided to reveal the secret?
Well, I appreciate what you wrote, don't take it wrongly but please can you answer me on one question? When you profit, it means someone loses yeah? So in any way someone has to lose, doesn't matter how experienced these traders are, one can't profit without another ones' lose.
And what about to forget targets? I think you can't plan economy because your plan of daily 3% may ruin chance of getting 10% profit or you even won't reach your target so this means your plans failed? And some may start digging to get that planned profit next day combined with tomorrow's plan and it will ruin everything, especially when we talk about newbies.

Thanks for calling me a trade Guru By the way. And yes atleast read the whole post before writing anything merely for money, don't take it wrongly yes I can answer your questions if they really are questions.

When you profit, it means someone loses yeah? So in any way someone has to lose, doesn't matter how experienced these traders are, one can't profit without another ones' lose.

This is the most lame excuse I am listening from someone who doesn't wants to learn something. You know only 2% traders in this market are profitable. And if you really want to be in these 2% then this might be a secret you want to hear. But trust me even out of 200 who learn this secret only 4-5 people would be able to implement it because it requires strict discipline. So if you want to think that someone will lose if I make profit better try to retire and go for the path of enlightenment.

And what about to forget targets? I think you can't plan economy because your plan of daily 3% may ruin chance of getting 10% profit or you even won't reach your target so this means your plans failed?

It's called creating a discipline best way is to put a trailing stop loss once target is hit because no one has a magic ball to predict how far price is going to go. Moreover limiting your losses comes with a practice of limiting your profits too and this is called intelligence in long term.

And some may start digging to get that planned profit next day combined with tomorrow's plan and it will ruin everything, especially when we talk about newbies.

The only line which i feel is pretty relevant in your post. This exactly is a very good point. I will surely bring this up in part-II. you don't have to be emotional regarding your loss and will have to focus on next day. But here in this post all I told about was Risk Limiting and not emotional profit taking.

[cosmofly]

Yes. This is really one of the very important knowledge. Many newbies really don't know how important capital management is. They are only interested in their indicators and profit after each position is opened.
That's why more than 95% of the original traders often got burned out.
They really need to read this article to better understand how much speculation is sufficient and reasonable.

[alexsandria]

That's alot thing to do. Well I might go for DON'T LOSE EVERYTHING AT ONE DAY it will surely lessen the probability of losing alot of money. Anyway step 1 and step 2 is for critical analysis of an exact computation of your decreasing your potential loss, and step 3 is for basic handling your potential loss which I recommend for everyone.

[MURONDI]

Such matters have often been discussed, in theory it might be easy, but the facts are difficult to apply, if you really have the secret in mastering trading, try to show your trading history, unfortunately in the crypto exchange there are no facilities to follow one's trading, so we can monitor other people's trades in real time.

[Hippocrypto]

Such matters have often been discussed, in theory it might be easy, but the facts are difficult to apply, if you really have the secret in mastering trading, try to show your trading history, unfortunately in the crypto exchange there are no facilities to follow one's trading, so we can monitor other people's trades in real time.

Every trades can be a confidential matters, that's why I was not giving much attention on trading guides. Realtime trading is a good idea for taking quicker decisions, despite of the difficulties encountered. Crypto exchanges will always rely on traders, so it's very important to make sure to it that we're trading our promising asset beyond berish times.

[teosanru]

That's alot thing to do. Well I might go for DON'T LOSE EVERYTHING AT ONE DAY it will surely lessen the probability of losing alot of money. Anyway step 1 and step 2 is for critical analysis of an exact computation of your decreasing your potential loss, and step 3 is for basic handling your potential loss which I recommend for everyone.

Pretty well said but even step 1 & 2 are essential for everyone. Because instead of expecting odds to be in your favour you should keep the whole game in your favour.

Such matters have often been discussed, in theory it might be easy, but the facts are difficult to apply, if you really have the secret in mastering trading, try to show your trading history, unfortunately in the crypto exchange there are no facilities to follow one's trading, so we can monitor other people's trades in real time.

You know everything in this world is theory and you have to learn to do practical your self. Even if I show mu trading history that would just be like appealing people towards me they won't learn anything from it. Everyone has it's own style of trading which requires persistent hard work. Even when it comes to trading there is no overnight money. If you are thinking trading is some get rich quick scheme then you must leave trading ASAP it would only lose you money. Even the trading calls are scam and nothing else.

[dioanna]

Most of the people think that Trading is merely learning to read charts and then buying low and selling High. But that is absolutely wrong! This is the main reason why certain newbie Traders don't make money. I would tell you a secret which most of the Trade gurus don't tell you while they teach you trading. first of all to understand the Importance of Risk Management I would like you to go see this Post of Mine:

https://bitcointalk.org/index.php?topic=5199458.msg53013312#msg53013312

Now going through the basics. I would teach you how to learn basics of Risk Management and you will learn how to do a disciplined trading.

STEP 1: Understanding Risk to Reward Ratio
Risk to Reward Ratio is the most solid strategy provided by Risk Management Theory. It is called Risk to Reward but actually is Reward to Risk Ratio It basically is a ration which is developed by this formula

Profit you can earn per trade(Difference from Target to Entry)
_________________________________________________
Risk you take per trade (Difference from Stop Loss to Entry)

This means for example if you take a trade at $10000 and your pattern says a target of $10200 and stop loss at $9900. Now feeding in the values in formula:

$10200-$10000             $200         2
____________      =     __________   =   _ = 2:1
$10000-$9900               $100         1

This signifies that there is double the profit potential than the assessed Risk. Now Ideally people would say that 2:1 is the best ratio but I think it should be the minimum atleast until you become an intermediate trader who can have control on his emotions. How this is important? I would quote my own post:

I think a very important concept pretty dear to my heart which you really forgot is Risk Management. I consider 80% of success in Trading comes with Risk Management. If you can limit the amount of risk in every trade to maximize your return. You just don't need any guidance in selecting your trades. Because if you are trading even with a 60% win strategy a good risk management technique can increase the returns upto 80% because it teaches you how to earn greater from the trades you win and lose less from trades you lose by setting a favourable Risk to Reward Ratio. Let's consider an example to understand this.


Case 1: 60% win ratio with 1:2 Risk Reward
You take a Risk to Reward Ration of 1:2 which means you Buy at 9000 and set your target at 9200 but keep your Stop Loss at 8900. Which means maximum loss is $100 but max profit is $200. Now if you keep this ratio over a period of say 100 Trades.

Now Assuming you get profitable in 60 trades which means you earn 60x200 which is $12000 and you lose 40x100 which means $4000. Your net gain still is $8000.


Case 2: 80% win ratio with 1:2 Risk Reward
You take a Risk to Reward Ration of 1:2 which means you Buy at 9000 and set your target at 9100 but keep your Stop Loss at 8800. Which means maximum loss is $200 but max profit is $100. Now if you keep this ratio over a period of say 100 Trades.

Now Assuming you get profitable in 80 trades which means you earn 80x100 which is $8000 and you lose 20x200 which means $4000. Your net gain still is just $4000 with a better strategy.
This is why people say that it's better to have a better Risk Management strategy.

STEP 2: Understanding Power of Compounding
What most traders forget is that aim is to be profitable in long term and earn money and not to just hit a good trade today. So bring the power of compounding in your play. Set small daily targets like 2%-3%. This might seem small but no matter what is your account size this is the only way to earn profits.

Have a look: If you have an account size of $1000 and earn just 2% daily. Trust me it might seem very easy but it isn't that easy to earn 2% consistently unless you keenly apply Risk management. Now,

Earning 2% for merely 100 days would make your capital like:    1000 x (1+0.02)¹⁰⁰ .
The answer would be $7376. This means you would make 7 times of your capital merely by earning 2% daily for 100 days. [People think that compounding is only a long term concept but truth is it can be applied to short term trading too.

STEP 3: Don't Risk everything in one day
You are fighting a war against the world and not merely a battle. A true warrior doesn't gets exhausted in one battle because he is here to fight a war. So never ever risk more than 3% of your capital in a day. Now you have to determine what is risking your capital. we have studies in step 1 that maintain a risk to reward ration so this risk ratio should be something in numeric terms say for example taking example taken in step 1 Risk was of $100. Now if your total capital was $20000. You are risking 0.5% in a trade which is way below the risk cap of 3%
$100
______  =  0.5%
$20000
So no matter how much capital you use in a trade but the risk per trade should never ever exceed what is the maximum risk cap.


These are basic 3 steps towards risk management. If you have any questions I would love to answer them. I would even have a FAQ below this thread about whatever major questions everyone is getting. Moreover I would love to come up with Part-2 of this thread where I would teach some intermediate principles. Stay tuned and I would love seek opinions of anyone who are not in agreement with these points.

Thank you for sharing your thoughts, I am trading since 2016 but I have not equipped my self that too much TA.
I am eager to learn but I am not really good with numbers and formula sometimes I feel really down bcoz of understanding things slowly.
I dream to be a good trader someday.

[nreal]

Your opinion is correct, but managing risks and disciplining in trading is extremely difficult for beginners. When I first trade I was affected by many things like news, other traders, Fears, ... All of which made me unable to keep discipline in all transactions.

[Ryker1]

[snip]
STEP 1: Understanding Risk to Reward Ratio
Risk to Reward Ratio is the most solid strategy provided by Risk Management Theory. It is called Risk to Reward but actually is Reward to Risk Ratio It basically is a ration which is developed by this formula

Profit you can earn per trade(Difference from Target to Entry)
_________________________________________________
Risk you take per trade (Difference from Stop Loss to Entry)

This means for example if you take a trade at $10000 and your pattern says a target of $10200 and stop loss at $9900. Now feeding in the values in formula:

$10200-$10000             $200         2
____________      =     __________   =   _ = 2:1
$10000-$9900               $100         1

Well, this is a good explaination OP and I like this number 1 risk management.
Risking money is hard to speculate but at least you know that anytime what will happen you are risking that you can afford.
Actually, In essence, in order to calculate the risk-reward ratio you only need three components:

1] Entry Price
2] Stop Loss
3] Take Profit

Try to refer to my source for further knowledge and I think the 3 basics are quite a lack of information.
Source: https://tradingstrategyguides.com/trading-risk-management-strategy/

[semobo]

Newbie traders losing when they try too many things which still they are not familiar yet,which could be related to don't risk everything in one day.We have to learn the things and find which will suit for us,until that keep the trade capital as negligible value from the total capital even $100 can teach lot things than learning from other.

[teosanru]

[snip]
STEP 1: Understanding Risk to Reward Ratio
Risk to Reward Ratio is the most solid strategy provided by Risk Management Theory. It is called Risk to Reward but actually is Reward to Risk Ratio It basically is a ration which is developed by this formula

Profit you can earn per trade(Difference from Target to Entry)
_________________________________________________
Risk you take per trade (Difference from Stop Loss to Entry)

This means for example if you take a trade at $10000 and your pattern says a target of $10200 and stop loss at $9900. Now feeding in the values in formula:

$10200-$10000             $200         2
____________      =     __________   =   _ = 2:1
$10000-$9900               $100         1

Well, this is a good explaination OP and I like this number 1 risk management.
Risking money is hard to speculate but at least you know that anytime what will happen you are risking that you can afford.
Actually, In essence, in order to calculate the risk-reward ratio you only need three components:

1] Entry Price
2] Stop Loss
3] Take Profit

Try to refer to my source for further knowledge and I think the 3 basics are quite a lack of information.
Source: https://tradingstrategyguides.com/trading-risk-management-strategy/

Very well said. I tried to concise the information so it doesn't becomes boring. There are books written on merely risk Management. If anyone wants to read those books here are name of some
1. A Trader's Money Management System - by Bennett A. McDowell
2. Market Wizards- By Jack D. Schwager
3. How to Day Trade for a Living - Andrew Aziz

Newbie traders losing when they try too many things which still they are not familiar yet,which could be related to don't risk everything in one day.We have to learn the things and find which will suit for us,until that keep the trade capital as negligible value from the total capital even $100 can teach lot things than learning from other.

This can be a good idea to test your strategies. Some people say that they should do paper trading but even trading with a very small capital gives you touch of real money and something which won't burn if you lose it completely.

[Harlot]

I don't think newbies are losing money because they simply cannot calculate the risk to reward ratio everytime they trade they just simply don't know how to trade at all. They enter the market thinking that the only thing they need to do is to buy cryptocurrencies and if it starts to go down they would panic without any kind of exit strategy or alternative plans ones that happens. They simply trade without any kind of plan or without any kind of knowledge backing their trades making them lose more money in the process. Still what they need to learn first is of course how to trade with technical analysis because this is their shield and sword in the market without it they are still newbies guessing where to buy and sell.

[TinaK]

I don't think newbies are losing money because they simply cannot calculate the risk to reward ratio everytime they trade they just simply don't know how to trade at all. They enter the market thinking that the only thing they need to do is to buy cryptocurrencies and if it starts to go down they would panic without any kind of exit strategy or alternative plans ones that happens. They simply trade without any kind of plan or without any kind of knowledge backing their trades making them lose more money in the process. Still what they need to learn first is of course how to trade with technical analysis because this is their shield and sword in the market without it they are still newbies guessing where to buy and sell.

people working in the industry might be effect by knowing everything and losing their fun but we can see the people still introducing a new business to start trading with their hard earned money.
We as a people we need to to explain the newbies how to deal the cryptocurrencies usage in the marketplace as well in the trading site before they getting into it.

[sarnic]

I don't think newbies are losing money because they simply cannot calculate the risk to reward ratio everytime they trade they just simply don't know how to trade at all. They enter the market thinking that the only thing they need to do is to buy cryptocurrencies and if it starts to go down they would panic without any kind of exit strategy or alternative plans ones that happens. They simply trade without any kind of plan or without any kind of knowledge backing their trades making them lose more money in the process. Still what they need to learn first is of course how to trade with technical analysis because this is their shield and sword in the market without it they are still newbies guessing where to buy and sell.

The hype around BTC and cryptocurrencies is rapidly growing, so many people are encouraged to enter the market with their assets, because all of their surrounding medias are telling them stories. In 2019, if you are a person who just found out that cryptocurrencies exists - first informations you'll receive is not a basic knowledge how the cryptocurrencies (or any other) market works, but you'll find a flood of empty words like 'earn money' 'earn money quickly' etc. pumping those newcomers with stories how somebody bought BTC for X$ couple years ago and now he is millionaire, billionaire or whatever. My point is - mainstream medias aren't talking about the background, knowledge you need to have to invest and they won't do it, it's not their job/role in the modern society. It's a throwing people in at the deep end. If you ask those people whether they would invest in stocks, almost certainly they would say no. Why? "Because I have no idea about stock market". Neither they don't need to have an idea what the hell cryptocurrencies are, but who cares - the communiques intercepted by them are clear - you don't need anything to make money. And guess what - it's not all about the money.

You don't need to be an educated economist or professional trader to trade crypto - but it's better for you if you are one.

[its-a-me-mario]

I think your second point about the power of compounding is something a lot of ppl forget, thanks for the well-written post. 2% a day would be a great target, and isn't too far off. Especially if you do some arbitrage trading as well.

[Hypnosis00]

*Don't risk Everything in one day

I agree with this. Decision making and self-control are very important in trading and pretty obvious that noobs will always mismanage themselves and even caught into overspending. It for sure, they know that risk but is something there is a need to further enhance their understanding of the risk that they are facing today for them not to lose everything they had in just one day.

[leowonderful]

If you're especially new to trading, you don't necessarily need to set profit targets for yourself to reach at first either. I found that I got extremely stressed and performed worse when I started out trading and trying to hit my own personal targets, even when those targets were low, and most people extremely new to trading crash and burn a few times at first as well. You should still be adhering to your risk management plan whether or not you've got a profit target, though.

Also realize that you should not be basing your stops only with the R/R ratio. The market does not care about where your stops are, so use technical analysis whenever possible first before worrying about whatever R/R target you want. You'll be stopped out less this way. I also don't believe in having a certain minimum R/R per trade; this varies from situation to situation and there's times when the R/R of one trade's lower than another, and that's just fine.