If the probability is too high, we must find ways to reduce it. If you can reduce the probability of your bankruptcy to an acceptable level, then you have taken an important step towards the goal of trading survival. In essence, in any transaction, the greater the proportion of your venture capital, the higher the risk of being destroyed or bankrupt.
I use an example to illustrate the risk of bankruptcy. Suppose there are two businessmen, Bob and Sally, and Bob and Sally attend the same seminar, where they learn a simple currency trading system called System One. The average profit of system 1 is equal to its average loss, and the accuracy rate is 56%. Both of them take US$ 65,438+US$ 00,000 as their financial boundary, and define the 100% loss of venture capital as the bankruptcy point. Trader Bob is an adventurous trader, and decides that the risk capital of each transaction is $2,000, while trader Sally is conservative, and the risk capital of each transaction is 1000.
Therefore, trader Bob has five funds to trade, while Sally has ten. If Bob starts trading and fails five times in a row, he will go bankrupt. And Sally needs ten consecutive loss-making transactions to bankrupt him.
Bob and Sally must ask themselves, what are their respective bankruptcy risks? Maybe when will they lose 10000 dollars? You can use the bankruptcy risk formula summarized in the figure below to answer this question.
This formula assumes that the average profit of traders is equal to the average loss.
As you can see, although Bob and Sally use the same currency trading system, their bankruptcy probabilities are different. Bob has a 30% chance of losing venture capital, while Sally has only a 9% chance of being defeated. Obviously, Bob's risk is far greater than Sally's.
Is Sally's 9% probability of bankruptcy risk low enough to survive the transaction? The answer is no, as a trader, you should make your trading risk close to 0%.
The statistical probability of any financial bankruptcy above 0% is too high, and it is only a matter of time before you finally go bankrupt. However, even if the risk of bankruptcy is 0%, you must understand that this still cannot guarantee to avoid the risk of bankruptcy. Because a trader with a bankruptcy risk of 0% can't guarantee the accuracy of your trading method, and can't guarantee the average income and average loss in the future. If they remain unchanged or even offer, a 0% bankruptcy risk will ensure that you will not lose everything.
Let's continue to take Bob and Sally as examples: What will happen if the accuracy is increased from 56% to 63% with the same average income and average loss?
Bob's bankruptcy risk decreased from 30% to 7%, and Sally's bankruptcy risk decreased from 9% to 0.48%.
Mathematically speaking, the bankruptcy risk cannot reach 0%, however, it is entirely possible to reduce the bankruptcy risk to below 1%.
Establish a bankruptcy risk model based on the logic of the book "Fund Management Strategy for Futures Traders". The calculation results of the model after many simulations are shown in the following table:
That is, the higher the average income-average loss ratio, the lower the bankruptcy risk.
To sum up, there are three tools to reduce the risk of bankruptcy:
However, you need to realize the following:
Despite these restrictions, the concept of bankruptcy risk is very important, and it is the key to survival.
The concept of bankruptcy risk requires that you should not trade unless the bankruptcy risk is close to 0%.