ICT Market Maker Primer Course - 02 - Considerations In Risk Management.srt

Last modified by Drunk Monkey on 2021-06-10 06:17
1 00:00:12,809 --> 00:00:20,849 ICT: Okay, folks, welcome back. This teaching is going to be specifically dealing with considerations and risk management, This module will, hopefully
2 00:00:20,849 --> 00:00:29,279 will be a little bit more of a sober reminder about how we should be looking at risk, and how we can manage risk to survive and have longevity in our trading.
3 00:00:30,059 --> 00:00:38,549 Now, maybe you had this in mind, when you first got into the trading natural, the guy that sat down with you before told you, hey, this method is so good, you
4 00:00:38,549 --> 00:00:47,039 risk 10% of your equity, it's going to make you money. Okay, if you have equity balance of $10,000, you're going to risk 10%. Now, the first last year soon,
5 00:00:47,579 --> 00:00:58,109 guess what, you just took a $1,000 loss. Okay, system says continue risking 10%.  So what do you do you get anything, you take the next trade, bang, you hit with
6 00:00:58,109 --> 00:01:14,399 an hour loss, your equity now sits at $8,100.03 losses, you hit with another $810 loss, bang, your accounts not $7,290. This goes on for what could easily be
7 00:01:14,429 --> 00:01:24,689 seen in anyone's trading eight, string loss, eight string loss that is absolutely realistic, guys, I don't care how good a trader you are, you're going
8 00:01:24,689 --> 00:01:31,919 to get this upside your head one day, and you need to be prepared for it. If you're going to risk 10% of your equity simply because you think you're going to
9 00:01:31,919 --> 00:01:44,909 be hitting it on the next trade and you've been in drawdown, there's a psychological impact that traders go through. And we more or less deny the
10 00:01:44,909 --> 00:01:53,489 technicals that may be indicating that we're in a trade, it's not going to pan out, but we won't let go of it, we start armwrestling with the market because
11 00:01:53,489 --> 00:02:01,889 hey, you know, we're gonna be right, and it's gonna feel so good when we are.  And we can give the middle finger not to be crude to the screen, you know, cuz
12 00:02:01,889 --> 00:02:12,089 of the screen, you say I got you, I got my money back. Everybody wants to have that stuff, you had that feeling of conquering the market and beating the guy
13 00:02:12,089 --> 00:02:19,649 that took the money from you last time. Everybody wants to go into the endzone, slam football down and do their victory dance and all that. But that doesn't
14 00:02:19,649 --> 00:02:28,109 work in this business. And they'll hand you your head on a platter. If you give them the opportunity to take your money. And a lot of it, they're going to be
15 00:02:28,109 --> 00:02:45,419 more than happy to take it from you. If you just take an eight loss streak here and your equity of $10,000 your account draws down $5,217. That's 52% 52%.
16 00:02:45,419 --> 00:02:54,959 Folks, you think you can take eight trades in a single week. The week some of you guys on these forums, trade. This could happen in a day. Now, I'm not saying
17 00:02:54,959 --> 00:03:03,299 that most of you guys aren't risk that are risking 10% you know, but there are some neophytes that come into this business and that they're going to do it. And
18 00:03:03,329 --> 00:03:11,849 I'm sorry. But you know, maybe you'll come off the gate, make a cup of wins and think, man, you know, I'm risking 10%. And look, it's it's really working out
19 00:03:11,849 --> 00:03:21,719 well. But man, I'm telling you this, that cycle leads to destruction, right?  Just eight trades. Look at this. If you have eight losses, you're crushed.
20 00:03:21,719 --> 00:03:30,629 That's that's a huge drawdown, not a met Not to mention the emotional impact and your mental equity because not only are we trading with real tangible money
21 00:03:30,629 --> 00:03:40,889 currency, in our account, that equity base is not limited to $2 terms, you have an equity amount of money in your mind what you're really willing to absorb in
22 00:03:41,129 --> 00:03:51,149 risk. You may have put 10,000 pounds on account. But man, you don't really want to be losing 4000 of it. So what are you really trading with? $4,000 that's your
23 00:03:51,149 --> 00:04:03,839 mental capital. So we're going to talk more about that when we get into wealth building money management. But for now, understand that risking 10% absolutely
24 00:04:03,839 --> 00:04:18,929 should be a no brainer for you. You don't do that. Okay, maybe you're so turned off by 10%. But hey, you know, you're not too afraid to take in risk to 5% per
25 00:04:18,929 --> 00:04:30,899 trade is it's doable for you. $10,000 starting account. Okay, first loss, Bang 500 loss. Now your account drops down to $9,500. You do this for a couple series
26 00:04:30,899 --> 00:04:38,999 of losses, you know, the fifth loss. Okay, now you're counting down to $7,737.  But hey,
27 00:04:39,480 --> 00:04:49,650 you're gonna make it back and you're not going to bend 5% risk on every trade.  Well, with the standard typical eight string loss that can happen to anybody.
28 00:04:49,800 --> 00:04:56,370 I'm not saying I've had this once a month. I'm not saying that I haven't, you know three times a year, but it's going to happen eventually. If you are in this
29 00:04:56,370 --> 00:05:07,440 business at any length of time. You will suffer a Eight last string, it's going to happen. If you had the risk of 5% portray sorry, with equity balance of
30 00:05:07,620 --> 00:05:21,870 $10,000, your equity would draw down to the tune of $3,016 or 30%. drawdown. Can you can you withstand that? Can you imagine taking eight trades in a single week
31 00:05:21,870 --> 00:05:33,210 and being drawn down? 30%? Let me tell you something, I have done that. I have done that, okay. And it is absolutely demoralizing because if you come out the
32 00:05:33,210 --> 00:05:40,080 gates strong, they can hear me I'm gonna, I'm gonna tear it up. Well, yeah, you're gonna tear it up, right? You're gonna tear up your account, okay, and
33 00:05:40,080 --> 00:05:47,040 you're gonna sit there and you'll be depressed for the entire weekend, you're gonna mow over possibly adding more money? When that's not the answer? The
34 00:05:47,040 --> 00:05:56,010 answer is controlling the amount of money that you put up. And controlling yourself is very difficult when you're in a period of drawdown if you're a new
35 00:05:56,010 --> 00:06:07,320 trader, I'm talking from experience, okay, when I got involved with commodities, I was trading five and six, seven contracts of Chicago portrayed wheat. And
36 00:06:07,470 --> 00:06:16,590 really my balance, really should have been working with one midam contract. And I'm not going to go into contracts and specifications for commodities, but I'm
37 00:06:16,590 --> 00:06:25,590 just saying that I was over leveraging, and the worst part of it, I knew I was over leveraging. And when I was losing, it didn't hurt enough. I was going to be
38 00:06:25,590 --> 00:06:34,290 right. I was imposing my will on the market. And I'm telling you, you will lose doing that. It will hurt you doing that. You don't gain anything from that,
39 00:06:34,380 --> 00:06:46,140 except for misery and depression. Trust me, I know. Okay, so 5% risk is absolutely too much. It's insane. Don't do it. Now let's look at the typical
40 00:06:46,230 --> 00:06:52,590 traders thought going in. This is the standard mentality of all traders, if you read it on all the forums, all the books, we all say and I preach it to don't
41 00:06:52,590 --> 00:07:02,220 risk any more than 2% per trade. All right. Okay, we're gonna look at Trader one up here at the top, okay, at one trader, starting with an equity balance of
42 00:07:02,220 --> 00:07:13,470 $10,000. And he's going to risk 2% per trade, and he runs into the inevitable eight string loss, it's going to happen. Well, the account draws down after
43 00:07:13,470 --> 00:07:27,210 eight losses, $1,318 total percentage drawdown 13%. You could probably withstand that. I mean, most traders could absorb that. Certainly nutrients because
44 00:07:27,210 --> 00:07:35,850 they're in they're invincible. And they're eventually going to be in the next streak where they make 100% accuracy. So this is absolutely, you know, within
45 00:07:35,850 --> 00:07:44,250 the realm of comfort for most people, if they have a $10,000 equity balance, and they only draw down, you know, 1300 bucks, most people can absorb that. But
46 00:07:45,210 --> 00:07:58,170 let's flip the script for a moment. Look at Trader two. Okay. He starts with $10,000. And he's starting with 2% risk. Watch, what happens is first loss at 2%
47 00:07:58,200 --> 00:08:13,470 is $200. Suddenly, he has a problem, he has absorbed a loss. Something's going to take place in this traders mind that didn't take place in the first traders
48 00:08:13,470 --> 00:08:30,150 mind. So his next trade, he only loses $98. But it's still a loss. So the next trade he takes is what a loss of $48 look at just after three losses difference
49 00:08:30,150 --> 00:08:42,300 in terms of equity. Where are we at? Essentially in the same neighborhood? But look what happens over the period of the eight losses trader to after eight
50 00:08:42,300 --> 00:08:56,190 string loss. His account draws down $538 total percentage drawdown 5%. Do you see a difference there? What do you think trader two did differently that trader
51 00:08:56,190 --> 00:09:06,570 one didn't do. Number one, he identified the fact that he is not perfect. He identified or she rather indefinitely the ladies that are watching this Sorry,
52 00:09:06,840 --> 00:09:19,290 sorry, gals. The second trader here in our case study when he absorbs a loss, okay, he only takes one to do this the first loss immediately he cuts his risk
53 00:09:19,290 --> 00:09:30,300 in half. So no longer is he risking 2% for now he has drawdown at $200. So he risks on the next trade when his account equity is at 90 $100. He's going to
54 00:09:30,300 --> 00:09:37,170 risk 1% portrayed. Now he assumes another loss. Does he stay at 1%? Absolutely not.
55 00:09:37,169 --> 00:09:49,979 What does he do he drops down to one half of 1%. So his next trade, he has a loss $48.51. Guys, you can take that. If you got $9,700 in your account and you
56 00:09:49,979 --> 00:09:56,969 can lose $48 you can lose 50 bucks. You're not losing sleep over that. If you can lose if you lose sleep over that type of loss with the equity balance of
57 00:09:56,969 --> 00:10:05,999 9007 hours. Stop trading. It's not for you. Go, go bet at the horse racing game play lottery, something like that. But I'm telling you, you have to assume some
58 00:10:05,999 --> 00:10:13,139 kind of risk, you know, this is goes along with everything that's been discussed in the beginning of the disclaimers, I mean, you have to understand you're going
59 00:10:13,139 --> 00:10:22,559 to lose money in this business. And if you're not comfortable with losing money, on a consistent basis where you're not perfect, bottom line is stop trading,
60 00:10:22,739 --> 00:10:29,909 okay, I have losses, you're gonna have losses, too, I can't teach you how to trade perfectly without losses, no one can, you're not gonna be able to find it.
61 00:10:30,119 --> 00:10:36,509 And if that's the Grail you're looking for, it doesn't exist. Trust me, it doesn't exist, because I'd pay everything I have for it. And it's not there,
62 00:10:36,539 --> 00:10:49,769 trust me. So let's keep this train rolling here. Okay, after he drops his equity risk to one half of 1%. Okay, and he has another loss, the fourth loss, okay.
63 00:10:50,009 --> 00:11:02,459 $48.27. While he takes another loss, he stays at one half of 1%. Look what happens at the end of his eight losses. He's got a huge amount of his starting
64 00:11:02,459 --> 00:11:14,879 equity still at his disposal, and he suffered eight losses, he hasn't had one winning trade yet. Now contrast that with trader one. This guy, he's down 1300
65 00:11:14,879 --> 00:11:29,699 bucks. trader two, he's only down $538 5% drawdown is absolutely tolerable. And anyone trading, I mean, you're gonna you're gonna suffer 5% Good grief 5%. You
66 00:11:29,699 --> 00:11:39,149 know, that's it you're trying to make in a day some some of you guys that are trading, you have to control your risk. Again, if you have a loss, cut your
67 00:11:39,149 --> 00:11:49,259 risk. If you have another loss, cut your risk trade and drop down to one half of 1%. Now, if you have five or six trades, then you've lost that half 1% drop it
68 00:11:49,259 --> 00:12:02,249 down to a quarter percent. Okay, whatever suits your risk appetite that you have to do, but you have to go the other way you do not. You do not average down
69 00:12:02,249 --> 00:12:09,839 loads you don't take Well, I lost 2% I mean risk for now. Because if all it takes is one trade, and I'll make that back and maybe even make the 2%. And I
70 00:12:09,839 --> 00:12:18,449 was hoping to make on the previous trade that last or only had to make you know half of what I lost in terms of pips on the last trade by risk fortune. Don't do
71 00:12:18,449 --> 00:12:26,249 that, guys, I've done it. I'm telling you, I've done it. Granted, I'll give you this and I'm gonna be fair. There's been times where early on, I did it and it
72 00:12:26,249 --> 00:12:32,759 worked out in my favor. But when I tried it later on, it crushed me and never gave it back to me. It took more and it took more and more and I'm telling you,
73 00:12:33,089 --> 00:12:42,779 it is a loser's game, trust me. I know this by firsthand experience. It never pans out over time. Doesn't happen. Okay? So just don't do it. If you have a
74 00:12:42,779 --> 00:12:55,679 loss, cut your risk. Cut your risk, cut your risk. Alright. Now let's assume let's stretch this out a little bit. Alright. trader one had a drawdown of
75 00:12:55,679 --> 00:13:06,989 13 $100. Okay, on eight losses, not one trade was a winner. All eight were losers. Well look at Trader two. Let's assume for a moment the guy hits. He's
76 00:13:06,989 --> 00:13:14,999 got a bad run, you know, he's got some problems in his personal life and 95 getting him. You stressed out his boss is driving and crazy. You know, he's
77 00:13:14,999 --> 00:13:22,769 rushing trades. He's not following the system. He's not feeling well. He's spending too much time in forums and not really studying the charts. It's
78 00:13:22,769 --> 00:13:32,069 something that's keeping him from being disciplined, okay, he's not hitting on all four on all cylinders. Something's wrong, maybe he's got a system doesn't
79 00:13:32,069 --> 00:13:41,849 work. Maybe he's a bank, he hasn't abandoned his bad habits. Bottom line is is he's not made a profitable trade yet. Look what trader two can absorb, he can
80 00:13:41,849 --> 00:13:53,039 absorb three times the amount of loss that trader one can. Following this same approach, the first loss, risking 2%, the only draws down to 90 $100. Second
81 00:13:53,039 --> 00:14:03,359 loss, risking 1%. Now because he's trimmed back to his risk, he only loses $98 his drawdown goes to 90 $700 and his account. Now he's at one half of 1%. And he
82 00:14:03,359 --> 00:14:16,889 stays there. Okay, all the way through up to 24 losses, this gentleman or young lady could have a loss string of 24 losses and still be less than the first
83 00:14:16,889 --> 00:14:32,459 trader. Think about that. This guy or gal can have 24 losing trades, and still have lost less than the first trader on a trade because he didn't augment his
84 00:14:32,459 --> 00:14:35,639 risk exposure. You have to control
85 00:14:35,819 --> 00:14:43,889 the amount of risk in your account. If you do not do this, no one's doing it for you. I can't do it for you. Your wife can't do it for you. Your husband can't do
86 00:14:43,889 --> 00:14:51,869 it for you. The kids can't do it, that a broker certainly ain't going to do it.  Okay. So you have to have this in your plan. It has to be mounted on the wall
87 00:14:51,929 --> 00:14:59,759 tattooed on your hand. It's got to be on your forehead. So when you see yourself in the mirror, you see this all the time, control risk. I can't stress it
88 00:14:59,759 --> 00:15:08,999 enough. Nobody talks about it enough in you have to do this, you absolutely have to do this. Okay? This will give you the the Viagra effect not to be crude, but
89 00:15:08,999 --> 00:15:17,699 it gives you the staying power, you have to be able to absorb losses. If I'm telling you these banks, they're ruthless, it's good as my methods are, I still
90 00:15:17,699 --> 00:15:27,419 get slapped around sometimes, okay, it's going to happen. Now, granted, when we dropped down to half a percent, okay, we're not probably going to make a whole
91 00:15:27,419 --> 00:15:38,609 lot of money coming back out of it. Sure, that's fine. But there's a, there's a strategy that we're implying. That goes a long way in terms of a profitable
92 00:15:38,609 --> 00:15:49,529 career. Okay, if you can absorb 24 losses and only have 12% drawdown, you're controlling risk. There's not a trader out there, okay, that can beat their
93 00:15:49,529 --> 00:15:57,779 chest and say, I've been trading for five 810 years, okay. And I've never had an eight string loss. Okay, I'm telling you that they don't don't that's a unicorn,
94 00:15:57,809 --> 00:16:05,699 they don't exist. Okay, so you're gonna have strings of losses. I'm showing you how, even with a na, I've never had 24 losses, I'll give you that I've never had
95 00:16:05,729 --> 00:16:14,249 a string of 24 losses, but I've given you a shield. Okay, I've given you a mindset, when you step out in that arena, and risk your capital and you risk
96 00:16:14,249 --> 00:16:24,029 your money. This is your only defense, this right here. Okay, it's not the trade signals. Okay. It's not the amount of money you put in the account to start
97 00:16:24,029 --> 00:16:32,879 with. It's the amount of money you put up. Because whatever you offer them in your hand, open palmed, they're going to take it if they can. So if you give
98 00:16:32,879 --> 00:16:43,529 them a large percentage of it, all you're doing is enticing more interest and taking it from you. Okay, so the moral of the story is, if you have a loss, cut
99 00:16:43,529 --> 00:16:54,449 your risk, if you if you have a loss, again, you cut your risk, and you drop down to one half of 1%. Okay, and you stay there until we have a turn in equity.
100 00:16:54,599 --> 00:17:02,789 And when you start making money and started being profitable, okay. There's a way of going back to the original risk exposure. So your maximum risk exposures
101 00:17:02,789 --> 00:17:12,149 2% portrayed. Okay, how do we, how do we compensate for that? How do we get back to that, that point? Well, let's talk about that. Now. How do we, how do we go
102 00:17:12,149 --> 00:17:18,959 forward with this information? Okay, well, when we experience a loss, the first thing you want to do is number one, reduce risk. That's the absolute first thing
103 00:17:18,959 --> 00:17:25,769 you think in your mind not let me get back in and try to get my money back. No, you cut risk. Why? Because you already have a state of mind where you feel
104 00:17:26,099 --> 00:17:35,249 you're victimized, okay, I don't care how long you've been trading losses still haven't had an impact, okay? I don't like losing, I hate losing, okay, because
105 00:17:35,249 --> 00:17:43,649 my method wins more than loses. When it happens. I don't like it. Okay, but I don't beat myself up about and going into, well, you know, I lost $500 I'm gonna
106 00:17:43,649 --> 00:17:49,949 get in there and trade, and I'm gonna try to make $2,000 on the next trade because I lost five, I want to get four times as much money back I want to do
107 00:17:49,949 --> 00:17:56,849 and half the time. I don't think like that anymore. I did. I'm gonna give you this, I did think like that years ago. But I don't need to do that anymore.
108 00:17:56,909 --> 00:18:07,109 Okay. And you don't need to do that. Now, if you haven't adopted that bad habit.  This is hopefully keep you from doing it. So, if you take a loss of 2%, the next
109 00:18:07,109 --> 00:18:19,409 trade, you will only assume 1% risk. Now, should this trade result in a loss, the next trade will only assume one half of 1%. Okay, you will only risk one
110 00:18:19,439 --> 00:18:30,059 half of 1% per trade until you have made at least 50% of the drawdown of the equity dip from the trade risking 1% of equity. Okay, so in other words, the
111 00:18:30,119 --> 00:18:39,839 trade that you'd lost when you were risking 1%, whatever that amount is, let's say it's 500 bucks, you need to make $250, risking one half of 1% before you can
112 00:18:39,839 --> 00:18:52,439 trade up to the 1% risk per trade tier. Okay? Now you're going to risk 1% per trade until you make at least 50% of the equity dip that you used when you
113 00:18:52,439 --> 00:18:56,189 risked 2% per trade. Okay. So again, if you're risking
114 00:18:57,510 --> 00:19:07,410 $500, when you're risking 2%, at 1% risk, you need to make at least $250 before you go back to risking 2% If you lose, you go back to that system again, you
115 00:19:07,410 --> 00:19:15,390 drop cut in half, cut it in half, cut it in half. And now you have an opportunity to step back and say okay, I can take some blows, I can get knocked
116 00:19:15,390 --> 00:19:25,320 around, but I'm not getting taken out of the game. Okay, so now hopefully, hopefully, with this presentation, you can breathe. There's a way of doing it,
117 00:19:25,320 --> 00:19:33,750 guys. Okay. And this is how it's done. You can't stay in this business without controlling your risk. That's the moral stick to the game plan. Stick to the
118 00:19:33,750 --> 00:19:43,530 method of controlling risk using this approach, and absolutely guarantee, okay, you want the Holy Grail. This is the Holy Grail. This is it. You have to have a
119 00:19:43,530 --> 00:19:51,030 shield in this business. If you don't, your money is going to come to me. It's going to go to the central banks is going to go to the guys that know how to do
120 00:19:51,030 --> 00:19:58,050 this again, because I'm going to be in the game years from now, you know, and I'm going to still apply this approach when I have losses. This is how I do it.
121 00:19:58,290 --> 00:20:07,800 This is what kept me in the game. As long as there have been, it's going to be a concept that I hold closest to me. Because this is more important than my entry
122 00:20:07,800 --> 00:20:16,200 signals. This is more important to my ex. This is the absolute key and Cornerstone to long term success and careers and trading.