TomHall

ACCOUNT RISK MANAGEMENT

FX_IDC:EURAFN   EURO / AFGHANI
1106 18 41
ACCOUNT RISK MANAGEMENT

Above is an important illustration that will outline the difference between risking 2% of your capital per trade compared to risking 6%.

If you happened to go through a 10 trade losing streak, you would have gone from starting with £20,000 to having only £11,459 left if you risked 6% on each trade.
After 10 losing trades you would have lost over 40% of your account.

If you were more conservative and risked only 2% of your account per trade, you would still had £16,674 which is only a 17% loss of your total capital.

- 10 trades at 6% per trade would mean a 75% increase is required to get back to breakeven.

- 10 trades at 2% per trade would mean a 20% increase is required to get back to breakeven.


The point of this illustration is that you want to setup your risk management rules so that when you do have a drawdown period, you will still have enough capital to stay in the game.


Trade Safe.
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MaxLeverage
2 years ago
great info thanks for sharing
+1 Reply
TomHall TOP MaxLeverage
2 years ago
No problem at all.
+1 Reply
RightMove
2 years ago
Nice piece of work....
+1 Reply
petermp25
2 years ago
It's also however somewhat dependent on what time frames you use for your trades. By that i mean someone trading on a 5Min can't possibly be risking as much as someone on a 4h, and vice versa – someone on a 4h wouldn't usually be risking as little as someone on a 5Min.
+1 Reply
RichardSiegers PRO petermp25
a year ago
Sorry but that is so wrong what you say
2% is 2%

lets say account size $100k

5m chart 10pip stop-loss $100 a pip you lose $2000

(4h chart need larger stop loss because ART is larger)

4h chart 50pip stop-loss $20 a pip you lose $2000


time-frame doesn't matter 2% = 2%
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RichardSiegers PRO RichardSiegers
a year ago
5m = 200 a pip not 100
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RichardSiegers PRO RichardSiegers
a year ago
and 4h = 40 a pip -_- was thining os 1000 and not 2000 lol
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TomHall TOP RichardSiegers
a year ago
100% Agree on the time scale aspect.
The time frame or currency pair being traded shouldn't matter in my personal opinion, i trade 2% regardless of these factors.
+1 Reply
petermp25 RichardSiegers
a year ago
Time frame does matter.
A day trader will not be risking as much as a swing trader or a position trader per trade. Smaller time frames include more noise and fake price movements. With day trading you have a large amount of trades more than a swing trader would in any given month. Hence it would be ridiculous for a day trader to be risking the same amount on a 1 minute trade than a Swing trader would on a 4H or Daily trade. Based on what you said, you're telling me that a day trader makes/risks as much in one 1Minute chart trade that will probably last 10 minutes than a swing trader would on a Daily chart trade that would probably take 10 days to complete? Come on.

With greater time frames comes greater risks
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RichardSiegers PRO petermp25
a year ago
well i risk 2% on a trade that is based on the 5m chart (i look at many time frames to enter a trade)

so in order for a 4h chart trader to risk more money than a 5m chart trader he must risk more than 2%

because 2% = 2%


(im trading forex for over 10 years and are very successful doing it)
Reply
petermp25 RichardSiegers
a year ago
Yes, I am completely aware that 2% = 2%. Thank you.

Swing traders generally aim for greater moves and rewards and with those, greater risk is usually associated.
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Its a good illustration but i would inset that for small trader or beginners, specially with small accounts "Fixed Fractional" money management, like the above where you just use 2% of your equity on what ever trade you take, is less than optimal. It goes very slow in the beginning and suddenly it goes out of control when your account grows big or you have several loosers in a row it will make a massiv drawdown if you use the model above with more money and bigger contract sizes. where you have to adjust your contract size a lot between trades, and if you have 10 loosing trades it spins out of control.

Where as Fixed Ratio money management takes in to account the hole portfolio you trade, and the previous numbers you have made trading your set portfolio, and calculate the optimal matematical formula to when to increase or decrease lot sizes and takes in to account a slow down multible so it don´t spin out of controle. And that in the beginning it grows your account in the optimal way compared to each winner and looser. It takes you know your maximal drawdown for your trading strategy for the past year for an example, and your average winning and loosing trade.

I will suggest the book from Ryan Jones - The Trading Game Playing The Numbera to make Millions. It will take peoples average 20-30% return a year and make it a 80-150% return. Just using mathematics.

I hope this will make some new traders realize that trading profit is 10% the pips you make and 90% the money management you implement to those pips, this will get you out of the gate faster, but of course you need a profitable method to begin with.

Kind regards
+1 Reply
TomHall TOP ThomasJeff_DCM
2 years ago
100% agree.
The above illustration is a very basic outline of money management and should be molded specifically for the individual.

MM should be based on an number of factors from the traders individuals circumstances to the trading strategy / system being implemented.
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P_Parker
2 years ago
Thanks Tom, always important to be aware of :-)
+1 Reply
HEmmanuel PRO
2 years ago
Very valuable info Tom, many thanks for sharing.
+1 Reply
TomHall TOP HEmmanuel
2 years ago
Thank you.
Reply
rafal_w
a year ago
What do You think about keeping constant risk over multiple trades? Let's say You calculate 2% from Your entry level and stick to it via 6 trades.
When You calculate % risk each time You will not have positive outcome from 3 loses at begging and 3 winners on end, when Your risk/reward is 1:1
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TomHall TOP rafal_w
a year ago
Hi,

This is true, however it depends on how your plan is set.
For example at target 1 would you take off half of your position and let the remaining run?

Again it would all depends on what kind of strategy you are using, is it harmonic patterns or structure support?
If you are trading harmonic patterns you usually get 1.5:1 if not more depending on how deep the patterns complete on the Fibonacci.
If you are trading support and resistance most trades give a better than a 1:1 risk reward ratio.
Many traders make the mistake of letting there losing trades run and cut there winning trades short, try not to be greedy but squeeze the pips out of the winning trades and cut the losing trades short.
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