Why does newbie (character in the example) has two risk management rules in this example: i.e 200 pips and 1%. What does it mean?
Risk describes the loss if, after entry in one direction, price moves in the opposite direction. At some point the trader will exit the position to prevent it losing more and more money and a stop-loss order can be set in advance at this price level.
The distance in pips between the entry price and the stop-loss price tells you nothing about the loss in capital from your account. Therefore you have to adjust the size of your position so that the loss in capital is only a certain percentage of your account capital.
So, if my capital is £1,000 and I only want to risk 2% of my capital, that will be £20. If I want to set my stop-loss 200 pips from entry, my position size will be calculated as £20/200pips = £0.1 per pip.
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Thank you, response much appreciated.
Exactly this. Focus on treating risk as a % of your capital as pips don’t care what you balance is.
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