Trade With Titans

Risk Management Guide

_______________________________________________________________
Imagine standing at the edge of a vast, churning ocean. That's the market - powerful, unpredictable,
and full of both opportunity and danger. Now, picture yourself not just dipping your toes in, but
confidently navigating these waters, knowing you have the skills to weather any storm.

This isn't just a dream. It's the reality of traders who have mastered the art of risk management.

Introduction
The Foundation of Successful Trading
At TWT, we believe that mastering risk management is the cornerstone of successful trading. It's
not just about making winning trades; it's about ensuring that your losses don't derail your trading
journey. This guide will walk you through our approach to risk management, helping you develop
your own robust framework.

Our Trading Philosophy: Small Bets, Big Picture

At Trade With Titans, we are strong advocates for viewing trading in terms of placing small,
individualized bets at times when you have an edge in predicting the next step forward in price. This
approach has several advantages:

1. Emotional Management: Smaller bets help keep emotions in check, reducing the impact
of any single trade on your psyche.
2. Consistent Exposure: By standardizing your risk per trade, you maintain consistent market
exposure over time.
3. Longevity: Small, manageable losses ensure you can stay in the game long enough to
capitalize on big moves when they come.

Why We Prefer Futures

While we trade various instruments, futures hold a special place in our trading toolkit. Here's why:

1. Straightforward Leverage: Futures offer leverage without the complexity of options. This
simplicity is crucial for effective risk management.
2. Consistent Exposure: By standardizing your risk per trade, you maintain consistent market
exposure over time.
3. Edge: Considering the large amount of institutional flow in these products, there are
opportunities to capitalize on identifying and trading alongside large participants.
Chapter 1
The Risk Management Framework
Step 1: Determine Your Risk Tolerance

The first and most crucial step in risk management is determining how much you're willing to lose.
Here's our golden rule:

Only risk what you're willing to lose!

This means you should be emotionally and financially prepared if your trading account went to zero.
While this is an extreme scenario that proper risk management aims to prevent, it's crucial to start
with this mindset.

Step 2: Calculate Daily Loss Limit

To establish a daily loss limit, we use a conservative approach based on the worst-case scenario of
consecutive losing days. However, this is dependent on a trader’s risk-tolerance.

1. Assuming 40 consecutive losing days (equivalent to 2 trading months)

2. Divide total trading account by 40

For example, with a $50,000 account:

* Daily Loss Limit = $50,000 / 40 = $1,250

We round this down to a neat $1,000 for simplicity and added safety.

Step 3: Determine Unit of Risk

Now that we have our daily loss limit, we need to break this down into individual trade risk, which
we call our "unit of risk." To do this, consider how many trades you expect to make per day on
average.

In our example, let's assume an average of 5 trades per day:

Unit of Risk = Daily Loss Limit / Number of Trades

Unit of Risk = $1,000 / 5 = $200

This means each trade should risk no more than $200.

Step 4: Structure Your Trades

With our unit of risk established, we can now structure our trades. This structure will depend on
your specific strategy and the instruments you're trading. At TWT, we primarily focus on E-mini and
Micro E-mini futures for the S&P 500 (ES/MES) and Nasdaq-100 (NQ/MNQ).

Here's an example of how we might structure a 'standard' trade:

For S&P 500:

8 lots of Micro E-mini S&P 500 (MES)

5 point stop loss

Total risk: 8 * 5 * $5 per point = $200

For Nasdaq-100:

5 lots of Micro E-mini Nasdaq-100 (MNQ)

20 point stop loss

Total risk: 5 * 20 * $2 per point = $200

____________________________________________________________________________________________

At this point, you might be thinking:

"Hold on a second. How am I supposed to make any real money with such small position
sizes?"
____________________________________________________________________________________________

It's a fair question. After all, we're talking about risking just $200 per trade on a $50,000 account.
That's a mere 0.4% of your capital per trade. Surely, to make significant profits, you need to take
bigger risks, right?

Wrong.

In fact, this conservative approach to risk management is precisely what separates consistently
profitable traders from those who flame out. Let us show you why.

The Proof is in the Equity Curves.

What you're seeing are two simulated trading accounts, both starting with a $50,000 account
balance, both with the exact same parameters to demonstrate how luck and probability affect your
equity curve in the short-term. Here are the parameters:

• Win Rate: 55% (a realistic and achievable target)

• Risk-to-Reward Ratio: 1:2 ($200 risk per trade, $400 potential profit)

• Trading Period: 100 trades (about 6 weeks if averaging 3 trades per day)

Notice how both curves trend upward over time, but with some key differences:

1. Steady Growth: Account A shows a smooth, more consistent upward trajectory. They had a
great read on the market, with a little help from lady luck.

2. Manageable Drawdowns: While Account B experiences drawdowns, they're shallow and

recoverable. The account never dips below the starting balance for long. They went through
a few rough periods, but consistently trading your edge is important.

3. Survivability: Most importantly, both accounts survive and thrive through both good and
bad periods. It gives a strategy time to play out and demonstrate its edge.

Within 6 weeks (!) Account A experiencing ‘good-times’ for their strategy nets 32%, and
Account B experiencing ‘bad-times’ for their strategy nets a solid 10%.

____________________________________________________________________________________________

Chapter 2
Practical Application of Risk Units
Now that we have established our daily loss limit, our standardized unit of risk, and standard
position size, we can delve into the more dynamic aspects of risk management. This is where the
real power of our approach becomes evident.

Flexibility in Trade Execution

The beauty of sizing in units of risk is that it allows us to evaluate our performance more clearly and
adapt quickly to market conditions. It significantly reduces the amount of decision-making required
at the moment of trade entry, allowing us to focus on market dynamics rather than complex
calculations.

Let's explore some practical scenarios.

Scenario 1: Adapting to Increased Volatility

Imagine you're keen on buying at the 5540 level, but due to increased market volatility, you don't
think a 5-point stop will suffice.

Here's how you can adjust:

1. Reduce your position size by half

2. Double your stop loss

3. Your risk remains the same (1 unit)

For example:

• Standard trade: 8 MES contracts with a 5-point stop (1 unit of risk)

• Adjusted trade: 4 MES contracts with a 10-point stop (still 1 unit of risk)

As the trade progresses and you gain confidence, you can add the other half and adjust your stop
according to your new average price.

Scenario 2: High-Conviction Trade

If you're very confident in a particular level, say 19020, you can adjust your trade to reflect this
conviction:

1. Reduce the size of your stop

2. Double your position size

3. Your risk remains the same (1 unit)

For example:

• Standard trade: 5 MNQ contracts with a 20-point stop (1 unit of risk)

• High-conviction trade: 10 MNQ contracts with a 10-point stop (still 1 unit of risk)

Scenario 3: Limited Opportunities

On days when the market isn't offering many clear opportunities, you can adjust your approach:

1. Double your bet size to two units of risk

2. Keep everything else the same

3. Understand that you now have only 3 more trades for the rest of the day (assuming a 5-trade
daily limit)
For example:

• Standard trade: 8 MES contracts with a 5-point stop (1 unit of risk)

• Limited opportunity trade: 16 MES contracts with a 5-point stop (2 units of risk)

Benefits of this Approach

1. Clarity in Performance Evaluation: By standardizing risk across trades, it becomes easier

to evaluate the effectiveness of your strategies over time.

2. Quick Decision Making: In the heat of the moment, you can quickly adjust your trade size
without complex calculations, allowing you to focus on market dynamics.

3. Flexibility: This approach allows you to adapt to different market conditions and your own
conviction levels without deviating from your overall risk management framework.

4. Psychological Comfort: Knowing that each trade, regardless of its specific structure,
represents a standard unit of risk can help reduce emotional stress and promote more
consistent decision-making.

A Word of Caution

While this flexible approach to applying risk units is powerful, it's crucial to maintain discipline.
Here are a few guidelines:

1. Stick to Your Daily Limit: Even if you're using larger size on some trades, never exceed your
predetermined daily loss limit.

2. Be Honest About Conviction: Don't use the high-conviction approach as an excuse to

over-trade. Be objective about your reasons for adjusting trade size.

3. Track and Review: Keep detailed records of how you apply this flexible approach. Regularly
review to ensure you're not unconsciously taking on more risk than intended.

4. Start Conservative: If you're new to this approach, start with the standard trade size and
gradually introduce flexibility as you become more comfortable.

Remember, the goal of this flexible approach is to optimize your risk management, not to find ways
around it. Used wisely, it can significantly enhance your trading performance and adaptability to
market conditions.

____________________________________________________________________________________________

Chapter 4
The Psychology of Risk Management
Implementing these risk management principles is as much about psychology as it is about math.
Here are some key psychological aspects to consider:

1. Consistency is Key: Stick to your risk management rules even when you're on a hot streak.
It's easy to get overconfident and increase your risk, but this often leads to oversized losses.

2. Embrace Small Losses: Don't be afraid of small losses. They're a natural part of trading
and are manageable within this framework.

3. Focus on Process, Not Outcomes: Judge your trading by how well you stick to your risk
management rules, not by the outcome of any single trade.

4. Stay Humble: The market can humble even the most successful traders. Always respect
the market and the risk it presents.

____________________________________________________________________________________________

Conclusion
Risk Management as a Competitive Edge
At Trade With Titans, we believe that superior risk management is what separates successful
traders from the rest. By implementing these principles, you're not just protecting your capital –
you're giving yourself the staying power to capitalize on the big moves when they come.

Remember, the goal isn't to never lose. The goal is to manage risk so effectively that the wins far
outweigh the losses over time.

In the words of legendary trader Paul Tudor Jones:

"The most important rule of trading is to play great defense, not great offense."

By mastering the art of risk management, you're playing great defense. And in the long run, that's
what will keep you in the game and on the path to trading success.

Stay disciplined, stay focused, and trade like a Titan!