Risk Management Guide

Account Level Risk

Account level risk refers to the level of risk exposure a trader is willing to accept on their overall trading account, this covers all open trades and positions within the account and is typically managed through various risk management strategies.

• Risk Percent: limit the amount you risk per trade to a small percentage of the account balance.
• Leverage and Margin: leverage allows you to control large positions with a small amount of capital.
• Stop Losses and Take Profits: a stop loss automatically closes a trade if the market moves against the position beyond a certain threshold. A take profit closes a trade once it reaches a certain level of profit.
• Drawdown Management: set limits for acceptable drawdowns and do not allow your account to lose more than 10-15% of its balance before reconsidering your strategy.
• Risk-Reward Ratio: using a risk & reward charting tool or ratio calculation will determine whether a trade is worth taking. A ratio of 3:1 means the potential reward is three times the amount of the risk. This ensures that even if several trades are lost, the gains from successful trades can still result in overall profitability.
• Account Equity Risk: monitor you account equity, which is the current value of the trading account, including unrealized profits and losses from open positions, this helps maintain a buffer against potential losses.
• Personal Risk Tolerance: your risk tolerance (conservative, moderate, aggressive) helps in determining the level of risk they should take at the account level.

Trade Level Risk

Trade Level Risk refers to the risks associated with individual trades, and these risks are typically evaluated based on the trade characteristics, the market environment, and the strategies used.

• Price Volatility: the risk that the price of the asset being traded will fluctuate unexpectedly, leading to potential losses.
• Liquidity Risk: the possibility that an asset cannot be traded quickly enough in the market without impacting its price.
• Slippage: the difference between the expected price of a trade and the price at which it is actually executed.
• Order Failure: orders may be rejected or not filled as expected due to rapid price changes or liquidity shortages, especially in high-volatility environments.
• Leverage Risk: high leverage allows traders to control large positions with a small amount of capital. While leverage can amplify profits, it also increases the risk of substantial losses.
• Economic Announcements: markets can be extremely sensitive to economic data releases such as employment figures, GDP reports, and central bank interest rate decisions.
• Margin Call Risk: if the market moves against a highly leveraged position, a margin call can be triggered, requiring the trader to deposit more funds to maintain the position.

Risk Management Assistant

Our NinjaTrader Risk Management Assistant will help prevent losses and lock in profits, this tool was created by ClickAlgo Limited and can be downloaded with a fully-featured 14-day trial.

• NinjaTrader Risk Assistant

NinjaTrader Account Locking

The NinjaTrader platform has some very useless trade and account locking features to help prevent overtrading, to access these settings visit ninjatrader.com, log into your account and access your settings.

Once you have access to the settings window, select 'Risk Settings'.

Profit & Loss Account Protection

You can set limits to automatically liquidate and lock the account on a "not held" basis when the limit is reached. The account will unlock at the end of the session, or you can manually unlock it anytime by increasing or disabling the limit. If NinjaTrader’s default risk rules are stricter than your chosen settings, NinjaTrader’s rules will override yours.

Account Drawdown Protection

You can set-up an end-of-day drawdown limit or a real-time drawdown lock-out that will prevent further trading when you current drawdown reaches the threshold value you set.

How to Prevent Overtrading?

Overtrading can stem from various psychological and strategic factors where emotional trading leads to losses driven by greed, fear of missing out (FOMO), and revenge trading.

Other contributing factors include lack of discipline, insufficient knowledge, poor risk management, unfavourable market conditions, and broker incentives. Below are some highly recommended books that focus on trading psychology, discipline, and risk management.

• Trading in the Zone: this classic book emphasizes the psychological aspects of trading and teaches traders to develop the mindset necessary for consistency.
• The Disciplined Trader: this book dives into the mental discipline needed to succeed in the markets. It helps traders understand their emotions and how to control impulses like overtrading.
• The Daily Trading Coach: this book is like a daily guide to improving trading discipline and it offers practical techniques to manage emotional challenges, avoid overtrading, and build a structured trading routine.
• Reminiscences of a Stock Operator: a semi-autobiographical account of Jesse Livermore's trading experiences, this book provides valuable insights into the psychological traps traders fall into, including overtrading.