how much of your account balance (in %) do you risk on a trade?
[B][I]Also, if anybody would like to comment on the following, I’d really appreciate that… [/I][/B]
[I]According to babypips.com school – money management section – I should risk no more than 3% and risking 10% would be highly detrimental, as per the examples provided.
I’m highly inclined to follow these guidelines and recommendations because I want to start trading on a good footing (ie: having a system, back testing, demo trading for 2 months min, etc.) but it seems that 3% is so little. It would take so long to make any appreciable gains in order to plunge forward and grow my account. Comments?[/I]
Do not use ANY money until you know what you are doing and have proved it over an extended period on a demo account across different market conditions. When you do go to real money make it as small as you can initially. To answer your question I use a 1% standard risk model but altered in the light of what the market is doing at the time
Some of the greatest traders of our generation risk no more than 1% per position and have done quite well for themselves.
Frankly, though, the question is too ambiguous to answer, just like the question of the type of returns people make. There are way, way too many variables to make any hard and fast statements. It depends on risk tolerance, timeframe, trading system performance, etc.
The best way to explore the question is to test, test, and test some more. Experiment with different position sizing settings (which is really the bottom line when it comes to risk management) to see what that does to the performance, particularly in the drawdowns.
ok, so I’ve been ripping though babypips.com school pages – particularly the section that discusses leverage and margin in full detail.
I did some calculating based on 5% usage of my account just to see what risk would look like if i were to break this rule and go past the recommended 1 - 2%.
Here’s what I’ve calculated based on a micro account starting with $1000 in equity:
If I have $1000 in equity, that means I can control $5000 (at a 5:1 leverage)
At 5:1, I would trade 5 lots, which equals a $50 trade (or, 5% of my account balance/equity)
That’s $50 of margin used and $950 of margin available
Each pip value would be $0.50
Based on what I read over in this section, that means that I’d have over 1900 pips before ever getting a margin call ($950 available margin / $0.50 pip value).
If all my calculations are correct, risking 5% of an account balance doesn’t seem ‘risky’ at all, especially when you factor in stop losses at however many pips (lets say 20 for instance).
Have I got this correct, or am I missing something here?
The risk you are taking is not the same as your margin requirement. The former is based on the size of your position and the pips you are risking. The latter is calcuated by the size of your position and the permissible leverage ratio of your account.
I’m confused – it seems as though your pip value refers to a standard account (at $10/pip, depending on the pair).
My calculation was based on the use of a micro account, in which pips are $0.10 from what I’ve understood. In which case, at 5 lots, each pip value would be $0.50, no?
So, from what I understand about pip values:
Standard Accounts = $10/pip
Mini Accounts = $1/pip
Micro Accounts = $0.10/pip
In babypips.com school, they recommend that if one is starting with only $1000, they should then open a micro account in order to be properly capitalized.
Can you elaborate based on the numbers in my example? :o
In my example, I was risking $50 (5 lots for a micro account). Regarding pips, do you mean how many pips (as per your stop loss) you determine to risk – ie: risk/reward ratios?
In your post you referred to a lot. You should have specified microlot or minilot if you had meant some other amount. $1000 with say a 20 pip stop and 1% risk would allow you to lose a maximum of $10 ie 50c per pip. You then need to look at the very least at the maximum drawdown of your system. One of my (very profitable) systems has had a 12 run losing streak this year so my maximum drawdown (which included this run) was 16%. Had I been trading a 2% risk model 32% or a 5% model 80%. With the latter you would be effectively wiped out as to recover you would need to make 500% to get back to break even
There you go again. You are defining your risk in terms of your margin requirement.
Your 5% risk does equate to $50 on your $1000 base account. Knowing that, you must answer the question of how many pips the position you are contemplating risks. Let’s say it’s 50 - meaning you would exit on a 50 pip move against you. If we’re talking EUR/USD where a pip value for a micro lot is $0.10, that means your risk is $5/lot. Divide your $50 predefined risk by the $5 risk per micro lot and you get 10. That’s how many lots you can put on to risk 5% on the trade.
How much margin you use for that position size would then depend on your permissible leverage.
So, if I wanted to risk 1% of my micro account, that would be $10 in total. So, the next step would be to determine how many $0.10 micro-pips I would need to put towards a stop loss in order to arrive at my $10 or 1% risk. In this example, it works out to 100 pips. Knowing this, I can then decide how many micro-lots I should trade and then adjust the stop loss accordingly. For example, if I traded 2 micro-lots, then my stop loss would have to decrease to 1/2, or 50 micro-pips in order to keep within my range of 1% risk ($10) – otherwise, without a change in stop loss, I’d be risking $20, or 2% of my account with those 2 micro-lots. Similarly, if I traded 5 micro-lots, my stop loss would have to be cut down to 1/5 my original, or at 20 micro-pips in order to stay within that 1% level.
(Put this way, I can see why it wouldn’t be necessarily as wise to trade those 5 micro-lots at a 1% risk, because such a small stop-loss would result).
And then, with respect to margin, what you’re saying is that it is a totally different issue because my broker could use my $10 to control $1000 (100:1) or $500 (50:1), etc. and these ratios are different compared to my risk ratios above.
Thanks to all you guys for going back-and-forth with me on this one – I’m really learning a lot by throwing it out here and getting feedback! And, since money management is so important, this feedback is awesome!
I suppose the question that I should be asking is:
What leverage do you use (proportion of FOREX purchased vs account balance)?
According to babypips.com school, “… most professionals and money managers trade 1 standard lot for every $50,000 in their account …” – 2:1 leverage (or, permissible leverage as rhodytrader put it).
Article here: Leverage the Killer - BabyPips.com
So, in my discussion below I can see where I was mixing the two issues. Having said that then, what permissible leverage do you guys use? Do you also use 2:1?
NO!!! This is absolutely [B]not[/B] what I was saying.
This is where new traders get into trouble. You don’t pick a trade size then figure out where your stop is going to be. You figure out where your stop is going to be first, then figure out how large a position you can trade to match up with the total amount of capital you are willing to risk on the position.
Again, not quite right. Permissible leverage is what your broker will allow. That’s 50:1, 100:1, 200:1, etc. Actual leverage employed (sometimes referred to as gearing) is what you’re referring to above.
I’ll work the numbers and drill it into my mind.