No More Losses: The Game-Changing Magic of De-risking simplified.

Learn to De-risk Your Way to Success

Dec 23, 2023

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"My goal is always to improve my worst case scenario" Mark Minervini

Surely you have heard traders often say,

“I have de-risked my position, and now it’s risk-free”.

And wondered as a beginner,

What’s de-risking?

What the hell is a risk-free trade?

Yo!

In this article, I will explain its what, why, and how.

ssgoo….

What is de-risking?

When you enter a position, you have a certain probability of the trade going against you. And hence, every trade of yours will have a certain amount of RISK.

The risk of losing X amount of capital in that trade.

If you are using a strict stop-loss order, this risk is pre-quantified and is the maximum risk.

(Buy price - Stoploss price)* No. of shares bought = max RISK

Let’s take an example of a trade I initiated (last Friday) to understand this.

IRM Energy.

Buy price = 503 INR

Stop-loss = 481.75 INR

No. of stock bought = x (Lol, yeah)

max RISK = (503-481.75)x = ~21x INR

Now, this trade will have 1 of the 3 possible outcomes:

Price moves below the buy price and hits stop-loss: Realized max Loss
Price moves below the buy price but does reach the stop-loss: Unrealized Loss
Price moves above the buy point: Unrealized Gain

Outcome 1 and 2, I am losing money.

But outcome 3 (unrealized gain) allows me to manage the trade in a way that my trade becomes profitable, or at least a non-loss-making one.

This act of managing the trade once it moves in your favor, ensuring your trade has a zero probability of losing money is called De-risking.

Once you do this, your position is RISK-FREE.

You cannot lose.

You simply can’t.

But, how do you de-risk?

How?

How do you de-risk?

“By selling a portion of your position at a profit.”

How much to sell?

At what profit level to sell?

The profit level at which you sell determines how much (minimum) you need to sell to make your position risk-free (and vice-versa).

For your position to be risk-free, if you sell:

at a multiple of 0.5R, you need to sell at least 66.66% of your position.

at a multiple of 1R, you need to sell at least 50% of your position.

at a multiple of 2R, you need to sell at least 33.33% of your position.

The simple equation follows:

R multiple * x = (100-x)

where x = % position that needs to be sold to derisk the position.

For my IRM position to be risk-free, which has a max risk of ~4%:

at a multiple of 0.5R i.e. 2% profit, I need to sell at least 66.66% of my position.

at a multiple of 1R i.e. 4%, I need to sell at least 50% of my position.

at a multiple of 2R i.e. 8%, I need to sell at least 33.33% of my position.

at a multiple of 3R i.e. 12%, I need to sell at least 25% of my position.

at a multiple of 4R i.e. 16%, I need to sell at least 20% of my position.

Simple arithmetic right?

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Why should you de-risk?

“My goal is always to improve my worst-case scenario” ~ 2X USIC champion, Mark Minervini

My life changed when I truly understood the magnanimity of what Mark said.

The goal of trading is to make a lot of money.

This is only possible by preserving the money you have.

Your priority as a trader should have the following hierarchy:

Avoid a big loss.
Avoid a small loss.
—de-risk—
make a small gain.
make a big gain.

By derisking, you avoid the risk of ruin.

De-risking mathematically puts you in a situation where you cannot lose (or makes it very hard for you to lose).

That’s not all.

You don’t need to sell to only derisk.

You can also sell in such a way that you already make a small gain.

For example in my IRM trade,

If I sell a 50% position at a multiple of 2R i.e. 8% profit, I make a profit of 0.5R even if the remaining 50% hits the stop loss.

If I sell a 50% position at a multiple of 4R i.e. 16% profit, I make a profit of 1.5R even if the remaining 50% hits the stop loss.

See,

You can derisk and still add up your wins.

de-risk your way to consistent profitability.

And guess what?

these wins will compound.

Yeah, no shit.

Lastly, is there a downside to de-risking?

If your trade eventually goes on to reach way higher than 2-3Rs (say a 10R) and you sold half at 2R in the name of de-risking, then your profit essentially is capped.

This is a fact.

But there can be a bias as well.

This is a bias when you are only thinking about making profits, as opposed to preserving your capital.

You are giving up half the profits for taking 0 loss.

This is a risk-first approach.

And an essential downside, if at all.

(Especially if you are a beginner).

Summary:

This act of managing the trade once it moves in your favor, ensuring your trade has a zero probability of losing money is called De-risking.

You de-risk by selling a portion of your position at a profit.

De-risking helps you avoid the risk of ruin.

And,

If you want to cut short your learning curve and become consistently profitable as soon as possible, you need to learn trading in a systematic yet simple way.

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Homma Private Access membership:

HPA is a subscription-based educational service (on WhatsApp). Benefits include:

Daily Market Breadth, Momentum, Sector Rotation, and Relative StrengthUpdate.
Access to all my proprietary scanner toolkits, including the BBB (buy before breakouts) scanner and the Homma Khela Hobe 2.0 scanner.
Access to my proprietary Breadth-Momentum-Relative Strength & Sector Rotation dashboards.
Access to my Trading View indicators: Mswing indicator, Homma Khela Hobe, Buy before Breakouts (BBB), etc.
HPA Weekly: Hourly weekend deep dives and Q&A.
1-year access to The Technical Take premium.
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