Let's think about risk tolerance!

Hello, this is Capital Cat! Understanding your risk tolerance in monetary terms is a very important step to effectively execute your investment strategy and manage losses. By clearly understanding your risk tolerance, you can continue investing within a safe range. Below are some approaches.

1.Determine portfolio-wide risk tolerance as a percentage

A common approach is to decide what percentage of total assets you are willing to risk, and then set the actual monetary amount based on that risk. For example, if total assets are 10 million yen, setting a 1% risk tolerance meansthe amount you could lose in a single trade is 100,000 yen.

• Approach: Use the rule that you can tolerate a loss of 1–2% of assets per trade.
• Calculation example:
  • If assets are 10,000,000 yen, with a 1% risk tolerance, the per-trade allowable loss is100,000.
  • If you set a 3% risk tolerance, you can tolerate up to300,000.

In this way, determine your total asset risk tolerance and manage loss per trade accordingly.

2.Consider Maximum Drawdown

Maximum Drawdown refers to the largest decline in assets, and it is a method to calculate the maximum amount of asset loss you can endure. Use past trade history and simulations to understand how much loss you can tolerate. This helps you know a concrete risk amount.

• Approach: Base on how much asset decline you have experienced in the past and how much you were able to endure.
• Calculation example:
  • If in the past trades the maximum loss was 10% (1,000,000 yen), and you want to avoid deeper drawdowns mentally, implement risk management to keep it within 10%.

Set your risk amount based on your psychological risk tolerance.

3.Fixed monetary risk approach

Regardless of your asset amount, this method sets a concrete amount you are willing to lose per trade in advance. This approach maintains a consistent amount that you can mentally handle without scale adjustments.

• Approach: Set a specific amount you are willing to lose in one trade and manage risk within that range.
• Example:
  • For example, decide that you will lose up to 100,000 yen in any given trade, and adjust your position size to stay within that limit.

This helps maintain psychological stability while trading.

4.Setting risk tolerance using expected value calculations

Use expected value calculations to estimate what level of risk could yield long-term returns, and decide your risk tolerance based on that. This method computes the probabilities of success and failure, and per-trade gains and losses to determine if long-term profitability is likely.

• Approach: Calculate expected value based on win rate and risk-reward ratio, and set risk tolerance accordingly.
• Calculation example:
  • If the win rate is 60% and the risk-reward ratio is 1:2, with a risk amount of 100,000 yen, you would win 200,000 yen if you win, or lose 100,000 yen if you lose.
  • Set the risk amount after confirming that this expected value is positive.

5.Reverse-calculate from lifestyle needs

Calculate your investment risk tolerance by reversing from future goals and lifestyle. For example, set concrete goals such as buying a house, securing education funds, or building retirement savings, and compute the required level of risk to achieve them.

• Approach: Compute how much risk you should take by reverse-calculating from the goals or asset requirements you want to achieve.
• Example:
  • If you want to secure 5 million yen in five years, set an annual return target and calculate how much risk you need to take to achieve that return.

These approaches can be used according to your investment style, asset amount, and psychological risk tolerance.Keep risk under control while steadily growing your assetsby always understanding your tolerance and trading within a safe range.

• Set portfolio-wide risk toleranceto continue safely managing assets.
• Measure the risk you can endure with Maximum Drawdown.
• Use the Fixed Amount approachto trade with peace of mind.
• Check long-term profitability with expected value calculations.
• Decide risk according to lifestyle and goals.

Please use these methods to firmly understand your risk tolerance and proceed with investing in a planned way!

Capital Cat