Trading Principles: Importance of Position Sizing and Risk Management

Position size is crucial in trading success, emphasizing risk management over a high win rate or risk-reward ratio.

### Trading Principles for Consistent Profit and Long-Term Success
* 📊 Three important things for profitable trading are **win rate**, **risk-reward ratio**, and **position size**, with many traders overlooking the significance of **position size**.
* 💰 "Do not risk more than **3 to 5% of your total funds** in a single trade."
* 📉 Even with a high win rate, there is a possibility of experiencing a certain number of **consecutive losses**, emphasizing the importance of **risk management**.
* 🎯 Successful traders with low win rates achieve profitability through a good risk-reward ratio, where they **lose little when they lose** and **earn a lot when they win**.
* 📈 Before trading, it is crucial to decide on the **entry basis, stop loss, and target price** to form the **risk-reward ratio**.
* 🥊 Similar to Floyd Mayweather's defensive boxing style, in trading, it is more important to focus on **losing as little as possible** rather than trying to **earn a lot**.
* 🎲 Traders should make decisions based on **probability and statistics**, not emotions, and be **flexible to adapt to changing situations**.

Hello, in the financial market, it is said that risk management is more important than chart analysis. Today, I would like to talk about trading principles before starting trading. First of all, there are three important things to make a profit through trading: win rate, risk-reward ratio, and position size. Many people are aware that having a good win rate and risk-reward ratio is important for trading, but they often overlook the importance of position size. In the previous segment, you saw the research results that only two out of forty people made money with a 60% win rate. Therefore, today, let's delve deeper into the importance of position size mathematically. After watching the video until the end, your trading profits will increase significantly. Okay. Refer to the trading manual released by Emperor BTC, an overseas Bitcoin trader.

I present to you Emperor BTCN, an overseas trader with assets of over 10 billion KRW, who is still posting on Twitter. Let's find out about the position sizing method he explained right now. First, do not risk more than 3 to 5% of your total funds in a single trade. No matter what happens, do not risk over 5% of your assets in one trade. In other words, if the total seed allocated for futures trading is 1 million KRW, you should only enter up to 50,000 KRW at a time. If the profit-loss ratio is 1:1, then if you enter once and make a profit, it will be 1.05 million KRW. Oh, do you feel that making 50,000 KRW by trading futures with 1 million KRW is too little? In the coin futures market where you can use leverage up to 100 times, why bother making money slowly like this? Just put in 1 million KRW at once and make 2 million KRW.

If you want to make 300 billion won, calculated on a daily rate, it comes out to be 0.89%. 5% is by no means a small figure. Even if you are a trader with a very high win rate of 70%, there will eventually be a day when you experience six consecutive losses. This table indicates the number of consecutive losses you will experience if you trade 1,000 times with that win rate. A 70% win rate is very high, right? Just because the win rate is high, don't be overconfident and enter each trade with more than 50% of your total seed capital. Imagine experiencing six consecutive losses. Your seed capital won't disappear in an instant, right? That's just wishful thinking. It's a proven, objective statistic. If a person with a 70% win rate trades 1,000 times, it means that there could be one occurrence of six consecutive losses. So,

Do we need to do more research to increase our winning percentage by 80% to 90%? It's surprising that the winning percentage of successful traders who have survived for a long time is around 40%. It's really unexpected, right? Generally, we think that we need a high winning percentage to make a profit. However, the winning percentage of traders who actually make a profit is around 40%, not that high. So, how did these traders manage to make a profit in the market for a long time with such a low winning percentage? Yes, that's right. It's all about the risk-reward ratio. It refers to the ratio of profit to the average loss. If you engage in trading with a good risk-reward ratio where you lose little when you lose and earn a lot when you win, you can make a profit in the long run even with a low winning percentage. Before trading, there are three things that need to be decided in advance: the entry basis, stop loss, and target price. First, the entry basis.

When trading, there should be a basis for entering. If entering long, there should be a clear reason why you think it will go up. If entering short, there should be a clear reason why you think it will go down. The more of these reasons you have, the higher your success rate will be. Next is the stop loss. Looking at the chart, if you entered long on the red line thinking it would go up, but it doesn't go up and reaches the blue line, which is the point where your perspective of it going up is discarded, you set a stop loss at that point. Lastly, there is the target. If the chart flows according to the entry reasons, it will flow towards the target. The first target is usually the closest resistance line where the price can reverse. I will explain these three things again through my actual trading examples. The current chart is a 4-hour chart of Bitcoin on December 30, 23.

This is a chart. I usually refer to support, resistance trends, and RSI when trading. First, I draw a trend line connecting the highs and lows. Similarly, I draw a trend line connecting the lows. Since these trend lines usually act as support and resistance, I always draw these lines and mark the support and resistance levels. Here, we can see a concentration of selling pressure at the highs, forming a resistance zone. Similarly, there is a concentration of selling pressure at the lows, forming a support zone. I also look at the RSI, and I mainly enter at points where there is a possibility of divergence occurring in the overbought or oversold zones. Looking at the current hourly chart, we can see the price is decreasing, but due to a significant support zone, there is a possibility of a rebound as it finds support. Moreover, as this aligns with the trend, two potential support zones are formed.

When you look at the RSI, the price has gone down, but as the RSI goes up, a bullish divergence is confirmed. Based on these three reasons, I decide to enter a long position. To aim for the exact entry point, I mainly look at the 15-minute chart. The 15-minute chart also happens to come down to the oversold zone on the RSI. If it breaks the low once again and goes up, just like the RSI, even though the price went down, if the RSI goes up, a bullish divergence can occur. So, if the low is broken, I have placed a long order in advance to enter the long position. This is the basis for entering. The point where my entry basis becomes wrong is when a rebound does not occur and it continues to go down. If at the support zone where I expected support, there is no rebound and it just keeps breaking and going down, that would be the point where my basis is wrong. Therefore, at the support low, the stop-loss line, in other words,

Place a stop loss. Next, set a first profit-taking order near the first resistance level, which is a point where the target price is rising but may face resistance and turn back. By combining the entry basis, stop loss, and target price, three elements form the risk-reward ratio. So, how can traders with low win rates consistently make profits based on the risk-reward ratio? Let's talk about it. Profits vary depending on the win rate and risk-reward ratio. The table below shows the minimum risk-reward ratio required for a certain win rate. If the win rate is 50%, the risk-reward ratio should be 1:1 to maintain the principal. Therefore, if you want to make a profit with a 50% win rate, you must enter the market only at a position where the risk-reward ratio is greater than 1:1. The formula for calculating the risk-reward ratio according to the win rate is simple. First, calculate your own.

You need to know the win rate through trading journals or trading history so divide your win rate by 100 and subtract 1. If your win rate is 40%, divide 40 by 100, which gives you 0.4. Subtracting 1 from this gives you -0.6. If the win-loss ratio is greater than 1.5 to 1, you should make trades with a win rate of 40% or more to be profitable in the long run. I only speak about what I dislike. You need to establish your trading principles while studying abroad, then continue trading until meaningful statistics emerge. Calculate the win rate and identify the minimum win-loss ratio based on that. Before entering a trade based on your trading principles, confirm that it is possible to achieve a win-loss ratio greater than the identified minimum win-loss ratio. To survive in the market for a long time, it is more important to lose less than to earn more. Like the legendary boxer with 50 wins and no losses.

Floyd Mayweather, who is being recorded, is a typical out-boxer who perfectly hits the opponent by taking advantage of the gaps based on his extreme defensive and evasive skills. When it comes to ranking the world's sports stars' assets, Mayweather is always included in the top ranks, and he even rose to the top spot in terms of income among the world's sports stars with just one match. He is a symbol of wealth. However, this legendary boxer is being talked about for various reasons, one of which is his fighting style that causes boredom. Due to his fundamentally defensive boxing style, Mayweather polarizes opinions among boxing fans. Unlike fans who expect an exciting match, Mayweather, with his defense skills close to perfection, rarely gets hit in the face in most matches. Despite having excellent defensive and evasive skills, he never rushes in but rather focuses on defense.

In each match, continuously going towards the ring rope side and lightly hitting the opponent to raise the tension, Mayweather has been on an undefeated march in limited boxing. From the viewer's perspective, it lacks excitement. This is an interview with a player who fought Mayweather. Mayweather is said to prioritize defense first in his fights. Mayweather may have boring and dull matches, but he is the boxer who earns the most money. Similarly, in trading, just like Mayweather prioritizes defense over offense, it is important to focus on losing as little as possible rather than trying to earn a lot. Even if the excitement of making big profits is not immediate, if you focus on not losing as much as possible while trading, eventually, you can become a trader who earns the most money, like Mayweather. Personally, when it comes to trading, what is important is making rational decisions based on logic rather than emotions, and following those decisions.

Being able to adapt depending on the situation is crucial. The following scene is from the movie 21. Switch your Choice. Yeah, wait, remember the host knows where the car is, so how do you know he's not playing a trick on you? I wouldn't really care. I mean, my answer is based on statistics, based on variable change. Just asked you a simple question. When I was like the protagonist in the movie, traders should trade based on probability and statistics, not emotions. Just like not sticking to the door you first chose until the end, it is important to have the flexibility to change perspectives as things unfold. Do you remember the last scene of the comic 'Slam Dunk'? The shot that ended the final game with a victory was not a dunk or a 3-point shot, but a very basic 2-point jump shot. The moment that determines victory does not necessarily have to be flashy. By steadily accumulating these 2-point jump shots, it can lead to winning the game and become the decisive moment of victory.

Famous trader Ed Seykota left this famous quote, Everyone gets what they want in the market. That's right, everyone gets what they want in the market. For those who want to experience thrill and dopamine through trading, even if they can't afford to lose a large amount of money at once, they can still obtain the thrill and dopamine. On the contrary, for those who seek profits from thrill and dopamine, if they gradually accumulate profits, like Mayweather's matches, without dramatic scenes, even if it's boring and not fun, the capital of the main players will continue to grow. Therefore, with the 100-dollar challenge I will start, based on what I have mentioned so far, I plan to enter with a maximum risk of 5% and aim for a profit-loss ratio of at least 1:1.5. I intend to make 3 trades a day. If I enter with 100 dollars and liquidate, I will deposit 100 dollars again.

Once again, entering all at once and trying to quickly double or triple the amount will not work. There is a saying that $100 is a real lion industry. Like a diligent cow, slowly walking towards Mali. Small profits steadily accumulate, and eventually, they become a big asset. If you want to make a big profit right away and engage in trading by putting a large portion at once, you may see big gains a few times, but eventually, you will lose everything. However, even after losing everything, the experience of making big profits a few times becomes poison, leading you to repeat the same mistake of gathering funds from here and there to go all-in for recovery. You can't forget the taste of that thrill. But to survive in the market for a long time, it is more important to earn less than to earn a lot. Once again, I will finish this video. Thank you until the end.

Thank you for watching. I wish all of you a prosperous future. Thank you.

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The Significance of Position Sizing in Trading

Position sizing is a crucial factor for profitable trading, often overlooked by many traders.

Emperor BTCN emphasizes the importance of not risking more than 3 to 5% of total funds in a single trade, highlighting the potential impact of consecutive losses even with a high win rate.

With a 70% win rate, the table shows that experiencing six consecutive losses is a realistic possibility, emphasizing the need for careful consideration of position size to avoid significant capital depletion.

Maximizing Trading Profits with a Low Winning Percentage

Successful traders can achieve long-term profits with a low winning percentage by focusing on a good risk-reward ratio.

This involves losing little when the trade is unsuccessful and gaining a lot when it is successful.

To increase trading success, it's important to have a clear entry basis, set stop-loss points, and define target prices in advance.

Entry reasons, stop-loss placement, and target prices are crucial for guiding trading decisions and maximizing profitability, as illustrated in the trading examples using Bitcoin's 4-hour chart and the consideration of support, resistance, and RSI.

Using Risk-Reward Ratio for Profitable Trading

The RSI can indicate a bullish divergence and signal a long position, especially when combined with a break in the low on the 15-minute chart.

Setting a stop-loss at the support low and aiming for the first resistance level helps form the risk-reward ratio.

Traders with a low win rate can still make a profit by ensuring their risk-reward ratio is in line with their win rate, prioritizing the preservation of capital over high earnings.

The Defensive Boxing Style of Floyd Mayweather

Floyd Mayweather is known for his defensive out-boxing style, which has made him incredibly wealthy but also polarized boxing fans.

His strategy of prioritizing defense over excitement has led to boring matches for some, but it has also contributed to his financial success.

Similar to his approach, traders are advised to prioritize minimizing losses over making big profits, focusing on rational decisions and adaptability based on statistics and probabilities.

Just as Mayweather's basic 2-point shots were crucial for victory, steady and consistent trading strategies can lead to success.

Ed Seykota advocates for getting what you want in the market, whether it's thrill and dopamine or gradual profit accumulation.

He emphasizes starting with a $100 challenge, managing risk, and aiming for a 1:1.

Seykota promotes making small, steady trades instead of trying to quickly double or triple the investment, highlighting the importance of earning less for long-term survival in the market.