Just wanted to start the weekend discussion early as I think it's time someone brought up the subject of risk management.
It doesn't matter what book you read, or any successful trader/investor you talk to, protection of capital is THE most important thing you can do. Regardless of the asset class you play with (real estate, stocks, futures, options, etc etc) if you don't preserve your capital, you can't continue to invest. It is THE number 1 rule.
You would think with all the literature out there, the average retail trader would use a little risk management. Even if it's a simple as "Never risk more than 5% of your capital". But as a generalization, it doesn't happen. The shine of leverage to get extra returns is too much for most and generally too much is risked. I'm not perfect, I am guilty of it too. Fortunately the lesson was cheap (in dollar terms) and happened a few years ago but it still paid the tuition fee.
We could discuss general risk management all weekend (well hopefully anyway) but I wanted to share a specific idea.
It doesn't matter where you look on the internet, the "holy grail" system is being searched for in every corner. Traders everywhere are looking for the "one" indicator that will make them rich. You can pay a fortune for black box systems that back test perfectly and when applied to the market, they don't work. Let me be clear, THE PERFECT INDICATOR DOESN"T EXIST.
What does exist and works is good risk management. I wont harp on about the different methods and exact figures but with a little common sense, good risk management is easy to do, and will keep your trading capital in good shape.
Using the above thoughts, if the perfect indicator doesn't exist but good risk management does, WHY have I never seen risk management integrated into charts?
There are plenty of indicators telling you where to buy and sell, but none to tell you where to place stops and targets based on your account and performance.
With the above thoughts in mind, I started a small coding project to help automate my risk management.
Please keep in mind this is a work in progress but I wanted to get a weekend discussion going so I have posted it in incomplete form.
What I wanted: Risk management with exact values plotted on my chart showing where to put stops and what the risk to my account is.
Why I wanted it: When scalping, decisions sometimes need to be made very quickly and the mental arithmetic to check risk management can sometimes take too long. (I'm not getting younger)
I also want it to work regardless of the market I am looking at and be based on volatility to keep me out of the noise.
One of the risk management methods I use is based on placing my stops at 3 x ATR. This is a well published method so I thought I would use it as a basis for my project.
On the below chart, it shows my project to date.
Basically it has bands showing where 3 x ATR is so regardless of the direction of bet, a band shows you where to place a stop. It is important to note I never move stops away from the entry point. Always reduce risk.
In the top right hand corner I have a currency value that shows the currency amount risked if a trade were to be taken and a stop placed on the appropriate band.
Of course the parameters of this are changeable and are shown in the top left hand corner. I have the ATR multiplied by 3 and an ATR period of 14. I can turn the bands off if I choose (that's the true statement) and I have extracted the dollar/euro value per tick and displayed it for convenience. The next step is to display the individual risk value as a percentage of a total account (100k) in this example and give a go/no-go indication somehow.
Hopefully my idea's help others focus more on money management than the perfect system and encourages a weekend (at least) of healthy discussion, debate and idea exchange while I continue to work on my LCD tan and coding skilzz.
(20min delay)