I understand what you are saying, and the thought process behind why you perhaps have this question. Although, one of the scenarios that you mentioned above is fundamentally flawed, whilst the other is what experienced traders and textbooks advocate as the correct way to manage risk.
First of all, and as you have mentioned, there typically is never a fixed stop loss [in pips] that will be applied to each and every trade. This is because all trades are different, and depending on the market at the time of the trade you may feel that a larger or smaller stop loss is required so that you fit into the Price Action which is taking place.
I would most certainly take the approach that irrespective of the size of the stop loss [in pips], you still risk the same amount in total over the trade in question.
Applying this to your original question
Example 1: Stop loss 50pips. 50 x £10 per pip = £500 total risk on trade.
Originally Posted by Pipllionaire
£500 has to equal 5% risk of account, therefore your account balance has to be £10,000
Example 2: Stop loss 30pips. 30 x £10 per pip = £300 total risk per trade.
£300 has to equal 5% risk of account, therefore your account balance must be £6,000
This is a backwards approach, you should be looking at your available account balance, deciding how much you want to risk as a total percentage and then dividing this over the pips that you require to place a suitable stop loss. This way you are always risking the same % of your account, regardless of the trade in question. This makes managing the trade, and more importantly your exposed risk more linear.
Example 3: Your account balance: £5,000
Agreed % to risk on trade: 5%
Agreed stop loss size [in pips]: 50
What should your position size be?
Answer: (Total Account Balance x Agreed % to risk on Trade) / Agreed Stop Loss [in pips]
Workings: (£5,000 x 5%) / 50 = £5 per pip.
By using this approach, no matter how big or how small your Stop Loss you will always be risking the same % of your account on each trade, which in the above example is £250. I'd certainly be able to sleep better at night knowing that I have this level of consistency, and control.
All of the above is in GBP [£], if your are trading an instrument that does not have a base P&L in GBP then you will need to convert at the appropriate exchange rate. However, what's important here is that already you know what your total risk will be on the trade, regardless of what it is that you are trading.
As explained, this is the correct way - Scenario 1.
Originally Posted by fxpirana