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2024/07
What are methods used to control risk?
Strict risk control is the cornerstone of rational trading and the essence of successful trading activities. The most experienced traders always proceed with caution.
Three primary methods to control risk are capital management, time control or time stop-loss, and spatial restriction or space stop-loss.
Risk Control Methods
a）Capital Management:
For trades involving large timeframes and significant swings, reasonable position sizing and timely adjustments are crucial. This requires trading with small positions for larger waves (extension trading).
Start with a small position to test the market. If the market moves against your expectations, exit the small position to limit the loss. By continuously probing at low costs, you can find opportunities to increase your position when the trend is favorable (positive pyramid).
Capital management is complex and strict for long-term, large-swing trades, suitable for institutions and low-efficiency stock markets.
However, in active, high-leverage, low-cost speculative markets like day trading, the complexity and importance of capital management are significantly reduced. Day trading typically involves prominent positions with no increments but allows for position reductions.
b）Time Control or Time Stop-Loss:
This method primarily applies to short-term trading, especially intra-day trading. Using flexible time zones to control risk relies on experience and intuition, especially in ultra-short-term trading. Time stop-loss is a crucial tool for intra-day traders, though challenging and complex. Time stop-loss methods become significantly weakened for small position and large swing trades.
- Time Control:If the expected result (quick profit) does not occur within a specific timeframe, prepare to close the position.
- Time Stop-Loss: This is a proactive action taken before a spatial stop-loss is triggered (in intra-day trading, spatial stop-loss is passive).
c）Spatial Restriction or Space Stop-Loss:
This method is mainly for small position large swing trades (extension trading), though also applicable to intra-day trading with wider stop-losses. Control yourself and strictly enforce spatial restrictions.
Spatial risk control is visible and shared market information. Although spatial stop-loss is passive, it suits small and large swing trades due to light positions and long profit expectations. Thus, more expansive stop-loss spaces (elastic) should be set.
- Spatial Restriction:Intangible, based on experience and intuition, such as reducing positions when volume stagnates at highs.
- Space Stop-Loss: Tangible, intuitive market-shared information. Rules define the maximum stop-loss limit and exit form. Stop-loss restriction means exiting when the support level is breached.
Risk or Reward Potential and Win Rate
This concept is fundamental to developing optimal trading techniques.
a）Risk Control:
First, understand how to accept small losses, then learn how to achieve significant wins. Strict risk control under optimal trading techniques completes rational trading.
Most traders have small profits and significant losses, while a minority achieves large wins and small losses. The majority pursues perfection and high win rates, while the minority focuses on profit potential.
Pursuing substantial success is vital to stable profitability, with high win rates and accepting small losses as foundations for significant wins. Ignoring the risk/reward ratio elements makes it impossible to devise optimal trading strategies.
99% of market participants consistently incur losses because they naturally follow the path of least resistance, chasing market trends or catching bottoms.
The crowd is trapped by the erroneous “common sense and habit” thinking patterns, leading to consistent losses. Human nature, in its natural state, contradicts the market’s natural attributes.
Spiritual depth is separate from education or status. High education doesn’t equate to high spiritual insight; without sufficient practice and professional knowledge, one cannot grasp the market’s essence. Knowledge isn’t wisdom, but wisdom requires accumulated knowledge. Chasing trends or catching bottoms is human nature, amplified in the market.
The market’s dominant force is the collective energy of these two emotions (greed during rallies and fear during declines). No institution or individual can alter this collective force. The crowd’s push topples the trend, forming the market’s dynamics, filled with endless charm and vitality.
b）The Minority in the Market:
Opposite to the crowd are the few “nonconformists” who have undergone gruelling trials, recognized themselves, transcended themselves, and deeply understood the market’s underlying structure. The chaotic market is constructed by common human nature, with the continuously losing, disordered majority representing the market itself.
By understanding and internalizing these principles, traders can navigate the complexities of the market, focusing on risk management, consistency, and the balance between win rate and profit potential for successful trading outcomes.
