Risk Management 1
I firmly believe that risk management is the most important factor in trading, even more important than strategy in my mind, and if you're going to maintain some discipline to something, then please let it be risk management...
A good strategy with bad risk management WILL blow your account, but a bad strategy, with good risk management will still keep your account alive and in the game.
For the purposes of this idea, we will use a $1000 account size, on the assumption that most newer traders are around this figure.
So what is good risk management?
We hear that risking 1% per trade is good, but then following up with 50 trades a day isn't exactly in line with that.
Conversely, risking 5% per trade once a day isn't exactly the middle ground either, so what should your risk be?
First off, let me just tell you that I, nor any other trader, professional or amateur can tell you what your set risk should be as there is no set answer. It is one that only you can decide.
But to give you an idea of where to start, lets assume you have back tested a strategy which is known to be profitable over time but you know it has had 7 losses in a row and which is likely to happen again.
So, a $1000 account,
Lets assume you risk 2% per trade, and those 7 losses come around. You've now lost 14% of your account. Are you comfortable losing $140 in the space of 7 trades?
1% risk per trade is 7% loss of the account, or $70. Are you comfortable with that?
Maybe going to 0.5% is easier for you which is $35.
This is how you should come up with your risk per trade percentage. Not from me, not from anyone else, it has to be you. Forget the "I want to win big, and if I risk 2% per trade, and make a 1:3RR winner, then I have gained 6, 0.5% would have only made me 1.5% growth" Forget the winners, they look after themselves, its the losers that will eat you up if your risk is too much.
Another point to suggest is that if you place a trade, and you are somewhat uncomfortable watching the price slowly go towards your stop loss, then chances are your position or risk is too big. So lower it. If you aren't flinching at the potential loss, then its probably too low of a risk and maybe increase it a little bit
Lets also say your trade risk is 2% maximum, at a time. That means if you have 1 trade open, you have a 2% risk on that, if you wish to have 2 trades open, you risk 1% on each equating to 2% overall, or you bring the stops in so the overall risk is 2%. e.g. bring one to breakeven and the other maintains a stop of 2%.
Another question to ask yourself is are you profitable? For example the 90 90 90 rule. 90% of traders lose 90% of their account in the first 90 days. Though this statistic is somewhat contradicted by the ForEx chatroom, as everyone in there is a 'professional'.
If you aren't consistently profitable, then I would suggest go to a simulator, but if you don't want to do that, then I would argue even 0.5% is too much. Again, its about keeping your account alive long enough for you to become profitable.
So now you have set your risk per trade that you are comfortable with. Brilliant.
Now, what are you willing to lose a day? Lets assume you have settled on 1% per trade, are you willing to lose one trade a day and call it quits leaving you 1% down, or 10 times a day and potentially lose 10%? 2% daily loss, 3, 4, 5? Find it, do not exceed it
If you like to be in and out of trades but are only willing to risk a 2% daily drawdown, then maybe a 0.5% risk per trade is good for you, as it affords you 4 trades before you have to walk away. If you're comfortable losing 5%, maybe 1% a trade is good for you, offering 5 trades or 2 trades of 2%. You have to make these choices, write them in big bold letters on next to your trading station if you have to, but once made stick to them.
I want to put this out there as well, that I am not giving you these numbers, pick one and go from there. I'm asking you to think about your risk exposure on serious level as that is ultimately what will make you either a good trader, or one who thinks its a scam after losing all of your money.
Not every day is green, nor is every week. Thats the reality of this game.
For me personally, I dont wish to lose more than 2% a day. And in fact my losing days drawdown of the last 30 days are as follows:
Aug 25th -0.97%
Aug 31st -1.05%
Sept 5th -2.05%
Sept 19th -0.27%
Sept 20th -2.04%
Sept 21st -1.04%
All other days were either profitable, or not traded. I did have a 9.22% gain day on Sept 7th which completely writes off all these losses and gave me an overall gain of a few percent, and the rest of the winning days have grown my account.
Now, and be honest with yourself, are you doing this the other way around?
Losing 9% in a day, for 7 days of the month with the winning days being around 2% gains. It doesn't math. Restrict the losses. The winners take care of themselves and will always come around, same as the losses will always come around. But, the game is to stop those losses spiralling out of control and eating into the winners. Only you, and you alone can reduce these risks to yourself. Its you who has to have the discipline to say, nah, enough is enough. I'm done for the day. Not with the mindset of just one more, or this next one will be the winner.
LEVERAGE! BEWARE!
Moving onto something that is probably even more important than the aforementioned risk per trade is leverage, and margin.
The amount of people who are ignorant to the fact that say "ive a 2% stop loss, thats all I can lose" is frankly scary.
Leverage is money, given to you by the broker to trade bigger positions.
If you have a $1000 account, with no leverage, you can buy 1000 dollars in the forex markets.
If you have 50:1 leverage, you can buy 1000 dollars in the forex markets, with just $20 of your account. Its purpose is to enable you to free up your account, trade larger sizes with less up front. Or you could buy $50,000 and the broker lends you the other 49k and you put up the 1k.
Which brings us to margin , which is the money you put up front to the broker as a guarantee for the loan, or the leverage.
Now, I was watching a youtube guru the other day, who had an account of $100,000 dollars and was using a 2% risk with a 3 pip stop trading the EU. Simulator of course.
This is a scary and terrifying way to teach new aspiring traders. If you don't know why, then hopefully, you walk away from this with a better understanding of what is actually happening in the background when you press buy or sell.
Okay, so we all can agree that 2% of 100,000 is $2000 dollars right?
He has a 3 pip stop loss, meaning price per pip must be $666.66
(2000/3)
100000 units a standard lot and 1 pip is roughly $10
10000 units is a mini lot, and 1 pip is roughly $1
1000 units a micro lot, and 1 pip is roughly $0.10
This guy needs to get a value of $666.66 per pip.
So with some maths and a calculator, we can come to the conclusion that he would need a position size of 6,666,667 units of currency
He would need to use all of his $100,000 margin, with a leverage of 66:1 minimum to achieve this position in real life, and even then, it wouldnt breathe. It would be margin called within a second, IF the broker even allowed it.
With 100:1 leverage, he would be able to get into the trade and all is good, fine and dandy, no margin call, no brokers banging on his door...
That is, until a news spike comes out and drives price 30 pips in the opposite direction to his position and skips past his stop like it isn't there
30 pips at a cost of 666 per pip isnt 2000, or 2% of his account.
Its actually 10 times that and $19,980 rinsed. Gone. Blown. Bye bye. That is the damage that over leveraged positions do. His 100k account would be sat at $81,020. Almost 20% loss in 1 trade, at the wrong time
Watch this video of EURCHF in 2015, and whilst watching it, imagine what your account would look like, over leveraged, on the brink of margin position on the wrong side of this market.
youtube.com/watch?v=vbzw_zgQTbc
Price dropped roughly 1000 pips in a few seconds, and over 1500 in the space of an hour.
Where would Mr youtuber be if he was in there with his $100,000 account, 2 percent risk long on EURCHF on this day, at $666 per pip
Well its gone, for sure. In fact he lost his account 6 times over and ultimately has to find $660,000 from somewhere... a 2% risk isn't the only risk. Remember that when you're balls deep in a position, your margin is screaming and news is coming!!
I wish you all be safe in trading, and if you aren't green, don't be too red!
A good strategy with bad risk management WILL blow your account, but a bad strategy, with good risk management will still keep your account alive and in the game.
For the purposes of this idea, we will use a $1000 account size, on the assumption that most newer traders are around this figure.
So what is good risk management?
We hear that risking 1% per trade is good, but then following up with 50 trades a day isn't exactly in line with that.
Conversely, risking 5% per trade once a day isn't exactly the middle ground either, so what should your risk be?
First off, let me just tell you that I, nor any other trader, professional or amateur can tell you what your set risk should be as there is no set answer. It is one that only you can decide.
But to give you an idea of where to start, lets assume you have back tested a strategy which is known to be profitable over time but you know it has had 7 losses in a row and which is likely to happen again.
So, a $1000 account,
Lets assume you risk 2% per trade, and those 7 losses come around. You've now lost 14% of your account. Are you comfortable losing $140 in the space of 7 trades?
1% risk per trade is 7% loss of the account, or $70. Are you comfortable with that?
Maybe going to 0.5% is easier for you which is $35.
This is how you should come up with your risk per trade percentage. Not from me, not from anyone else, it has to be you. Forget the "I want to win big, and if I risk 2% per trade, and make a 1:3RR winner, then I have gained 6, 0.5% would have only made me 1.5% growth" Forget the winners, they look after themselves, its the losers that will eat you up if your risk is too much.
Another point to suggest is that if you place a trade, and you are somewhat uncomfortable watching the price slowly go towards your stop loss, then chances are your position or risk is too big. So lower it. If you aren't flinching at the potential loss, then its probably too low of a risk and maybe increase it a little bit
Lets also say your trade risk is 2% maximum, at a time. That means if you have 1 trade open, you have a 2% risk on that, if you wish to have 2 trades open, you risk 1% on each equating to 2% overall, or you bring the stops in so the overall risk is 2%. e.g. bring one to breakeven and the other maintains a stop of 2%.
Another question to ask yourself is are you profitable? For example the 90 90 90 rule. 90% of traders lose 90% of their account in the first 90 days. Though this statistic is somewhat contradicted by the ForEx chatroom, as everyone in there is a 'professional'.
If you aren't consistently profitable, then I would suggest go to a simulator, but if you don't want to do that, then I would argue even 0.5% is too much. Again, its about keeping your account alive long enough for you to become profitable.
So now you have set your risk per trade that you are comfortable with. Brilliant.
Now, what are you willing to lose a day? Lets assume you have settled on 1% per trade, are you willing to lose one trade a day and call it quits leaving you 1% down, or 10 times a day and potentially lose 10%? 2% daily loss, 3, 4, 5? Find it, do not exceed it
If you like to be in and out of trades but are only willing to risk a 2% daily drawdown, then maybe a 0.5% risk per trade is good for you, as it affords you 4 trades before you have to walk away. If you're comfortable losing 5%, maybe 1% a trade is good for you, offering 5 trades or 2 trades of 2%. You have to make these choices, write them in big bold letters on next to your trading station if you have to, but once made stick to them.
I want to put this out there as well, that I am not giving you these numbers, pick one and go from there. I'm asking you to think about your risk exposure on serious level as that is ultimately what will make you either a good trader, or one who thinks its a scam after losing all of your money.
Not every day is green, nor is every week. Thats the reality of this game.
For me personally, I dont wish to lose more than 2% a day. And in fact my losing days drawdown of the last 30 days are as follows:
Aug 25th -0.97%
Aug 31st -1.05%
Sept 5th -2.05%
Sept 19th -0.27%
Sept 20th -2.04%
Sept 21st -1.04%
All other days were either profitable, or not traded. I did have a 9.22% gain day on Sept 7th which completely writes off all these losses and gave me an overall gain of a few percent, and the rest of the winning days have grown my account.
Now, and be honest with yourself, are you doing this the other way around?
Losing 9% in a day, for 7 days of the month with the winning days being around 2% gains. It doesn't math. Restrict the losses. The winners take care of themselves and will always come around, same as the losses will always come around. But, the game is to stop those losses spiralling out of control and eating into the winners. Only you, and you alone can reduce these risks to yourself. Its you who has to have the discipline to say, nah, enough is enough. I'm done for the day. Not with the mindset of just one more, or this next one will be the winner.
LEVERAGE! BEWARE!
Moving onto something that is probably even more important than the aforementioned risk per trade is leverage, and margin.
The amount of people who are ignorant to the fact that say "ive a 2% stop loss, thats all I can lose" is frankly scary.
Leverage is money, given to you by the broker to trade bigger positions.
If you have a $1000 account, with no leverage, you can buy 1000 dollars in the forex markets.
If you have 50:1 leverage, you can buy 1000 dollars in the forex markets, with just $20 of your account. Its purpose is to enable you to free up your account, trade larger sizes with less up front. Or you could buy $50,000 and the broker lends you the other 49k and you put up the 1k.
Which brings us to margin , which is the money you put up front to the broker as a guarantee for the loan, or the leverage.
Now, I was watching a youtube guru the other day, who had an account of $100,000 dollars and was using a 2% risk with a 3 pip stop trading the EU. Simulator of course.
This is a scary and terrifying way to teach new aspiring traders. If you don't know why, then hopefully, you walk away from this with a better understanding of what is actually happening in the background when you press buy or sell.
Okay, so we all can agree that 2% of 100,000 is $2000 dollars right?
He has a 3 pip stop loss, meaning price per pip must be $666.66
(2000/3)
100000 units a standard lot and 1 pip is roughly $10
10000 units is a mini lot, and 1 pip is roughly $1
1000 units a micro lot, and 1 pip is roughly $0.10
This guy needs to get a value of $666.66 per pip.
So with some maths and a calculator, we can come to the conclusion that he would need a position size of 6,666,667 units of currency
He would need to use all of his $100,000 margin, with a leverage of 66:1 minimum to achieve this position in real life, and even then, it wouldnt breathe. It would be margin called within a second, IF the broker even allowed it.
With 100:1 leverage, he would be able to get into the trade and all is good, fine and dandy, no margin call, no brokers banging on his door...
That is, until a news spike comes out and drives price 30 pips in the opposite direction to his position and skips past his stop like it isn't there
30 pips at a cost of 666 per pip isnt 2000, or 2% of his account.
Its actually 10 times that and $19,980 rinsed. Gone. Blown. Bye bye. That is the damage that over leveraged positions do. His 100k account would be sat at $81,020. Almost 20% loss in 1 trade, at the wrong time
Watch this video of EURCHF in 2015, and whilst watching it, imagine what your account would look like, over leveraged, on the brink of margin position on the wrong side of this market.
youtube.com/watch?v=vbzw_zgQTbc
Price dropped roughly 1000 pips in a few seconds, and over 1500 in the space of an hour.
Where would Mr youtuber be if he was in there with his $100,000 account, 2 percent risk long on EURCHF on this day, at $666 per pip
Well its gone, for sure. In fact he lost his account 6 times over and ultimately has to find $660,000 from somewhere... a 2% risk isn't the only risk. Remember that when you're balls deep in a position, your margin is screaming and news is coming!!
I wish you all be safe in trading, and if you aren't green, don't be too red!
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