Started demo trading on forex on the back end of December 2015 and managed make some decent profits (and losses at the same time). Blew a few demo accounts but that was because I was taking stupid amount of risks and letting greed get the better of me.
Come March 2016 I went live as I thought going live will enable me to manage myself a lot better but unfortunately I made the same mistakes and blew my account a few times (real poor risk management right?).
Went back at the market and managed my risk a lot better (albeit still crap) and managed to double my account. Then the EU Referendum was happening and I thought “I could make all my lost capital back today” and what happens? UK VOTE TO LEAVE and I lost everything again…
So now I’ve decided to take a short while off from trading to re-strategize and start afresh. Stupidly I hadn’t had a trading plan beforehand (I don’t know what the heck I was thinking) but have been working on one now and will be a lot more careful going back into the markets.
Now whilst I was working on my plan I came across the following issue which kind of confused me:
• I do not want to risk more than 2% of my capital on any one trade and I have a reward to risk ratio of 2:1. So if I start off with £2,000 and am risking £40 on a trade, I am hoping to make £80 profit. This all make sense but then when I look at £80 as a %ge of £2,000 then that is of course 4%. Now the confusion is that people say 1% growth a month is a fairly decent return. So looking at 4% growth with one trade seems unrealistic. But cutting it down to 1% then in a month, £20 return would be “fairly decent” but then that cuts my reward to risk ration down to 0.5:1 if I am still risking 2%.
Can you see what I am trying to get at? Is there something which I am misunderstanding?
Not quite sure, but I offer you two observations, in case they help …
2% is pretty big position-sizing: you’d want to be [I][U]very[/U][/I] confident in your proven win-rate, profit factor and so on, to use that;
It may be that the people commenting that 1% return per month is pretty decent are looking at it in terms of “investing” than “trading”: for passive or long-term, occasional trades, that may be so, but I think almost every retail trader actively trading for a living would be extremely disappointed with only 1% return per month on their trading capital.
(Strictly speaking, any positive return could be said to be “pretty decent”, because most people lose! All of which goes to show that it depends on what you’re comparing yourself with).
One derives this arithmetically, from various statistics.
Without knowing what the proven statistics are, for your system, nobody can advise you in detail about this! You can see that, for example, a system with a 30% win-rate (which many successful, professional methods have) is going to require totally different risk-management parameters from a system with a 75% win-rate?
The book “[I]Profitability & Systematic Trading[/I]” by Michael Harris is a very good beginners’ introduction to this subject.
If you’re unsure what to do, I think you’d be well advised to start off by never exposing more than a maximum of 1% of your capital to risk on any individual trade, at least until you’ve completed 300-400 trades and can re-assess the position more realistically.
Risk management of 1:2 (SL/TP) per month. Say if you managed to win 1/2 of all your trade, it’s will be 1% per month and that equal 12% per year.
If this is the case/fact then I don’t think that 1:2 is a good risk management strategy, due to many fact a forex trader has to face. In term of returns, yes it’s 50% but not in term of chance/probability, it’s not as it does not take commission, spread … into account. I’ve not tried to calculate the reasonable % needed and I haven’t consider what % should be the logical one if risk management is set as such. Hopefully someone here can share their view.
Because, if it’s a mere 10-12% per year returns, I may as well buy some blue chips and get dividend and hopefully earn as the share price goes up. Taking into account that the risk in forex s very very high, compared to blue chips. I’d expect a 3-5 folds return minimum for a high risk venture like forex. Alternative, I have to make very very sure that my winning trade is way more than 50%, which is unlikely at the moment.
We have to learn that the risks in our trades could be higher and if we will take corrective steps then our trading will once again give us a steady income. This is also a reason why we have to use such a trading strategy that is both risk free and also gives us more returns in the longer term
I don’t think that risk free strategy exist, minimized the risk would be the option. Yes, more returns is what we are hoping for. That’s the reason me and many others are here to learn. The best part of this forex is they have demo account to test and learn. Even then, I’ve question. Are the quote from different broker different, taking into consideration that they charge differently. If there is a different, does it matter? What about their timing, are they real time or different, different by how long?
I think I may stick to a 2:1 in the short term (1-4 months) and then once I develop a strategy that is working will for me then will look at letting my trades long for longer for higher rewards.
There are quite a few “interesting assumptions”, above, as well as some good questions.
I don’t understand how you’ve tried to work that out: it isn’t possible to derive the monthly profit/returns from just the win-rate and R:R ratio without also knowing the number of trades per month and position-sizing. Even if you’re assuming position-sizing of 1%, the outcomes are going to be hugely different depending on whether you take 3 or 30 or 300 trades per month.
Figures discussed/given for such calculations conventionally include all dealing costs in their premises (in other words, the spread is assumed to be covered).
Are you referring to a 300% - 500% annual return on your trading capital? With apologies for sounding disillusioning (if I do), I wouldn’t think that one aspiring trader in 1,000 will achieve those returns, especially over the first few years. Maybe even not one in 5,000 or 10,000. Bear in mind that the overwhelming majority of people lose money (and if you want a note of hardened realism, that a Goldman Sachs floor trader with two math degrees, 10,000 hours of screen-time and a risk manager watching over his shoulder typically doesn’t achieve anything like that. Not a beautiful analogy, admittedly, but something to be aware of).
Possibly. But I wouldn’t assume this. I think having a win-rate above 50% could be a very reasonable, realistic and achievable objective, at the start. The higher your win-rate is (within reason), the easier your position-sizing is to manage, and that’s many aspiring traders’ downfall, [I]even among the small minority who have a genuine edge in the first place[/I].
They [I]shouldn’t[/I] be, and if they are, something’s wrong. Demo accounts should duplicate funded accounts, and run from the same software, displaying exactly the same prices and spreads at the same times, and so on. Otherwise what use are they?
There are two potential problems with this idea …
It’s very bad planning to set out intending to gain your initial experience under one set of parameters and then to change the parameters a few months later. I know many people try to do this, but they probably shouldn’t: it significantly reduces the value of the initial learning experience. It makes a whole lot more sense to start out by doing exactly what you intend to do in the long term.
Aiming at the beginning for a 2:1 reward-to-risk ratio is going to give you low win-rates and accordingly make your position-sizing harder to manage, by increasing the length not only of your predictable losing runs, but (more importantly and more commonly arising) your predictable losing patches … all those times when you win a trade and then lose three or four, win another and then lose three or four, and so on. Those are far more significant because they’re far more common. That’s easily dispiriting and disillusioning, and when it arises it’s impossible (without at least a lot of experience, not to mention some real understanding of statistics and probability) to judge whether you’re “just having a bad run” or “just using a bad system without an edge” or “just lacking the skills needed to execute it accurately and without errors”. One common situation is the one in which aspiring traders think that they’re probably having a combination of a slightly bad run and a slight skill-deficiency, but the reality is that they’re trying to learn by trading a system that actually doesn’t have a proven edge at all. The problem is that they don’t have the experience to know that that’s so, and have typically not done enough backtesting/forward-testing on demo to be confident of their conclusions. This scenario typically arises when people imagine that they can find a short-cut by “copying something (usually indicator-based) that just ‘works’,” and that “then everything should somehow work out ok”. It doesn’t, and there are reasons for that. These are the people making up the statistics of the overwhelming majority of aspiring traders who never manage to achieve that hoped-for 300% per annum return (or - in many cases - any positive return at all) on their trading capital.
I think use risk reward ratio 2;1 hence we can learn from our plan, it’s very good if we willing to spent time on few month to look our plan will work with good result if making fail, might if we still often loss hence mistake is from our analysis market
I am referring to his quote on "But cutting it down to 1% then in a month, £20 return would be “fairly decent”…
I’m assuming that 1:2 Risk Management is actually 10pips against 23pips, not 10 against 10/20, assuming that the broker just charge 3 pips spread without any commission.
My bad, What I;m trying to say that if it’s 1% per months, that will add up to 12 percent per year (12 months). 12% isn’t enough to justify the risk a forex trader take. I would be hoping for at least 3-5 folds of that percentage, meaning 36% to 50 % of the investment I made.
If it’s a mere 12% per year, I might as well invest my money on blue chips with 10% dividend, least I don’t have to work on my chart every night and I know that my investment are well taken for by professionals who works everyday for my money.
I want more, that’s why I am here, just hoping and learning to see if that’s possible with my limited knowledge…
