What are the most common risk management frameworks used in Technical Analysis?

Stop Loss: Decide a price where you'll sell if the trade goes against you to limit losses. Position Size: Figure out how much money to invest in each trade based on how much risk you're willing to take. Diversification: Spread your investments across different things to lower the overall risk. Trend Analysis: Look at which way the market is moving and go with it to avoid risky trades. Volatility: Check how much prices are swinging to adjust your trade size and risk. Risk-Reward Ratio: Decide if the potential profit is worth the possible loss before making a trade. Technical Indicators: Use tools like moving averages or RSI to help decide when to buy or sell and manage risk.

One should always follow a defined % allocation of the available capital when ever he or she is undertaking a new trade It has been observed that the major reason for failures of common investors is not to follow the money allocation formula They sometimes allocate almost all the capital to one trade which lead to fatigue, frustration and desperation Hence one should always follow the diversified distribution of money in taking new trades

Position sizing is probably one of the first few steps and one of the most important risk management process that a trader needs to consider when coming up with a trade plan. Never ever trade with more than you can afford to lose. Profit per bid is also a big consideration because it would equally translate to loss per bid if things goes south. This is especially important if one is doing margin trading. Always trade within one’s risk tolerance and ability to lose.

In any investment management strategy, position sizing is one of the key element. A right position sizing methodology is essential to earn higher risk adjusted returns. I have tried and tested several position sizing methods i.e. equal weighted, market cap weighted, risk parity position sizing, pyramiding etc. All the strategies have their advantage and disadvantages. A key point to decide is diversification vs diworsification. If we only look from risk management perspective, as the number of stocks increases the portfolio risk keeps declining but research shows that the incremental decline in portfolio risk becomes minimal beyond 30-35 stocks.

In my experience, I observed that only trading professionals will adopt a strict position sizing while retail investors may not. As a previous proprietary trader, this is a defined risk management system to limit loss to avoid concentration risk and to individual asset risk exposure. Hence the difference between a professional vs a retail trader or investors.

There are two broad types of stop loss in my opinion. First is what we call a technical stop loss. One will placed a stop loss based on charting, usually a few bids below a support level (for long) or when it broke out of an uptrend channel, etc. The second is using the stop loss ratio. In my opinion, a 2:1 or 2.5:1 would be a good stop loss ratio Same for profit taking. The first is based on technicals, where we set a profit target just below the resistance level (for long), or the tip of a uptrend channel, etc. the second is to set a profit target, say 10% or 20%. Both are disciplined methods. There is a third way which i favour, which is trailing profit. That is an increasing “stop loss” level as the price trend up.

Stop Losses and Profit booking are the essential components of making money in Financial Markets, if we are not using it well to our advantage, we are missing out on a big advantage provided and built inside the system Before entering any trade our percentages of stop loss and profit booking should be well defined so as to remove the emotions out of the trade

Knowing how to calculate stop loss and take profit is crucial. Stop loss must be placed at a logical level that the market would have to hit to prove your trade signal wrong. When it comes to setting take profit, one wants to consider that it can be triggered by different market swings and is not necessarily predictable. It should be able to be randomly touched by price regardless of the direction you opened the position.

It is no secret to any of us that the Forex market is one of the most volatile markets and price movements may sometimes become unpredictable. So calculating both potential profits and losses makes a big difference. You simply cannot ignore the potential risks that may threaten your trading. Here stop loss and take profit come as the main risk management tools that help you control your exposure to any unexpected movements in the market.

Setting predefined levels to limit losses (stop-loss) and secure profits (take profit). These levels are based on technical analysis, support/resistance levels, or other indicators.

I have a different take on the risk reward ratio, where my money invested is competing with the risk free rate going. So if am able get the same return in 1/10th of the time then it is a good trade, otherwise that trade doesn't hold good to be executed

Depending on the time frame that one invest or trade in, the reward to risk will differ accordingly. From my view: For short term trades, a minimum of risk to reward 1:2 is advisable. For longer term trades, a minimum of 1:3 as the risk for holding a position longer should carry a higher reward else its is better to skip the trade.

Evaluating the potential reward against the risk in a trade. A commonly used ratio is 2:1, where the potential profit is at least twice the potential loss. This helps traders assess if a trade is worth taking.

The risk-reward ratio is a key concept in trading and investing, indicating the potential profit of a trade relative to its risk of loss. This ratio helps traders and investors assess whether a trading opportunity is worth the risk taken. A commonly used ratio is 1:2, where for every dollar risked, the trader hopes to gain two dollars. Effective management of the risk-reward ratio involves setting precise entry and exit points, using stop-loss orders to limit losses, and targeting profit levels to realize gains, thus aligning trading strategies with personal objectives and risk tolerance.

This must be defined before entering into any trade. As a trader one must aim for 1:3. Get into a trade when you see this potential. Greater the risk reward ratio - the better! This will help you be profitable even if your batting average is 40%

We have to constantly evaluate our trading strategy and the options available at our hand to use it effectively. Money allocation in trading plays a vital role in sustainable wealth generation, if we are allocating all the capital to one stock then it will not lead to good capital allocation. ideally, we should divide our money into 20 parts and invest it into 15 stocks at any given point of time rest 5 parts can be hold as cash to be deployed in other stocks to help us better navigate the journey towards Drawdown and Recovery

Monitoring the peak-to-trough decline in a trading account (drawdown). Recovery involves strategies to regain lost capital after a drawdown, emphasizing the importance of minimizing losses to prevent significant account depletion.

To avoid the Risk of Ruin, it is always advisable to use only 10% of the available capital in any of the trade taken by you. so suppose you have 1000$ to invest so you will trade with 100$ as first trade your next trade will be for 90$ as the available capital for 900$ and the same methodology will keep on going By adopting the above method it has saved me many times and kept me in balance and not to take overboard in any position

Assessing the probability of losing a certain percentage of trading capital, leading to account ruin. This metric helps traders understand the likelihood of catastrophic losses and adjust their risk parameters accordingly.

Risk management is one of my favorite topics as a project manager and a program manager I recently became aware of another set of risk metrics that can be used and applied in this area. Creating a solid risk management system is vital within technical analysis it also documents your thinking and risk approach for further future refinement. You can then go back and apply updated thinking as the market shifts.

An overarching strategy that encompasses all risk management aspects. It outlines the trader's risk tolerance, goals, and specific rules for position sizing, stop-loss, take profit, risk-reward ratios, and overall portfolio management.

Drawing an analogy, imagine a warrior entering a battle unarmed. He stands by idly, observing others fight valiantly. Similarly, a trader without capital protection (stop-loss) is akin to this unarmed warrior. Preserving capital is paramount, and stop-loss orders, along with profit-taking strategies, are essential tools for achieving this objective. The ultimate goal of trading is to generate returns, and neglecting to secure profits renders the entire endeavor futile. Trading psychology demands emotional control, specifically the ability to manage fear and greed. These emotions can cloud judgment and lead to irrational decisions. By implementing stop-loss orders and book profits makes you a disciplined trader and helps you to master it.