Trader Dale Volume Profile

Money management
Money management
Money management is an essential part of every trading plan. Even if your trading strategy is
really good, you can end up losing if you don't have solid money management.
How much to risk per trade
One of the most important aspects of solid MM is your risk per trade. Here is how to determine
how much to risk:
First, you need to do a backtest of your strategy. With the backtest done, you will be able to see
how the strategy performed over time. The most important thing the backtest will show you is
the biggest drawdown the strategy historically made. This way you will have a rough idea what
the worst scenario could be. It is important to keep in mind that this is only a backtest so the
actual worst case scenario will be a bit worse in real trading conditions (for example 20 % worse).
Let’s say that in the worst drawdown, the strategy made 6 consecutive losses. Add to it the 20 %
coefficient and you have 6 x 1.2 = 7.2 losses. So, you can expect that in the worst case you will
take 7 losing trades in a row.
Now, you need to think how much of your account balance are you prepared to lose and still be
relatively okay with it. Relatively okay means that you will be okay with such a drop and you will
still be able to think clearly and stick to your plan. Let's say that you feel comfortable losing 25 %
of your account balance. Obviously, this number will be quite different for everyone. I can imagine
an ambitious young person trying to turbo boost his small trading account who could still feel
relatively okay with 50% drawdown, whereas an older, more experienced trader with a much
larger account would feel really bad if he lost 10 % of his account.
In this example, let's say that you are mentally able to handle a drawdown of 25 %. In this case,
the 7 losing trades should represent the 25 % loss. If you divide the 25 % percent by the number
of trades, you get the percentage of your trading capital you should risk per one trade. In this case
it is 25 % / 7 = 3.58 %. Based on this simple calculation, your risk per trade should be 3.58 %.
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