Reading through a few of these posts everyone is throwing out numbers (risk 5% here, 2% here) suggesting they are good things. The problem is, this isn’t explained properly!
Risking a % of your account per trade is flawed. why?:
[ul]
[li]Slippage does and will happen.
[/li][li]Black swan events do and will happen.
[/li][/ul]
If you risk 2% per trade on a 10 pip SL, your exposure is enourmous! Imagine if you got slipped 600 pips in an unannounced news event, a natural disaster, or something of that nature. You’d actually OWE the broker money. Are [B]you[/B] happy being responsible for that?
The 2% or whatever rule works fine assuming you don’t get slipped, or caught in big news events, but they DO and WILL happen. Ignoring this is silly, and the wrong attitude to have if you want to consistently be profitable.
The 2% rule also massively fluctuates your exposure on every single trade… a 10 tip stop loss risking 2% is a LOT more exposure than a 250 pip stop loss at 2%.
I’m just saying in my opinion, don’t rely on 2% to be your answer, the markets are dangerous and being prepared the best you can is of paramount importance.
Would like to hear your thoughts and start a discussion…
After the eurchf debacle (and I was a winner that day) I opened accounts with other brokers and have spread my trades among them, different currencies with each to give me a bit more protection.
I set up more dealer accounts also. The reason for this is to reduce dealer exposure. If a dealer goes bankrupt leaving my funds washed out in the mix, I will be much happier that I left only 5% of my trading capital with him rather than 100% or even 50%.
BINGO. That is why short term highly leveraged trading is so expensive.
Many say “Don’t risk more than 1%” but we should say: “Don’t risk more than a basis point per pip.” If every pip you lose to slippage costs you 10 basis points, a thousand pips in slippage will wipe you out completely. Said another way: a pair trading at par that slipped against you 10% would cost you 100% (1.0000 is 10,000 pips; 10% of 10,000 is 1,000; if you lose 0.10% of your account per pip and lose 1000 pips you lose 100% of your account).
Better than that, you could say: “Don’t lose more than a basis point on a move that is less than a basis point.” Don’t lose 50% of your account on a 10% move in a currency pair.
As a new trader I might say: “But wait, if I limit my position size to one basis point per pip and I have a $1000 account I can only trade one microlot in EUR/USD. That is no leverage at all!” True, but I can use my leverage to go out and trade another position in AUD/JPY or GBP/CAD or any pair that doesn’t include the euro or the dollar. Or, suppose I am shorting EUR/USD and shorting USD/CNH, a sudden dollar blast in either direction would benefit one position even though the other gets hammered.
A trader trading position sizes of 1 basis point of his account per pip would double his account every 10,000 pips he wins.
In the eurchf case, some brokers fully covered their clients losses beyond stop loss, some didn’t. Some went bust (taking broker funds with them), some almost went but hung on, others were more secure.
By spreading your funds you gain more protection unless you are so unlucky that all your brokers go bust or all refuse to cover client losses (and I expect the regulators to stamp this out soon after the eurchf uproar)
Yes, this is exactly what I mean! I’m glad you understand.
Another interesting thought…just how many basis points should we risk? 2000? 5000? 10000? Evidently, the higher you go, the lower your returns per capital… but what can we assume is safe?
Better than that, you could say: “Don’t lose more than a basis point on a move that is less than a basis point.” Don’t lose 50% of your account on a 10% move in a currency pair.
What do you mean by this?
So many basis points within basis points… inception! :15:
A trader trading position sizes of 1 basis point of his account per pip would double his account every 10,000 pips he wins.
True… but the problem here is… “whaaaat, 10,000 pips to double my account?? if only I did 2% per trade I would be a millionaire by now!”
I guess therefore the more capital you have the better this works…making 10,000 pips is no easy feat!
I wonder if there is anyway of minimizing exposure risks but increasing returns…I guess not.
A 200 pip loss/gain reflects about 2% of my portfolio.
That all said, over 75% of my available margin is used in the market spread out amongst a dozen or so pairs at a time. In one account I have 30 trades running.
I survived the Franc debacle with ease and pretty much anything the market has thrown my way with ease.
To the original poster’s point, there is a lot more to risk management than one might think. Preservation of capital is the number one priority. And a comprehensive plan around that is paramount.
I am saying that basically we do not need to leverage up a trade in a given pair. Trade a position size that will yield the same percentage as the move in the pair. If the pair moves 5%, your account moves 5% or less. If a pair moves 20% in one illiquid minute, don’t lose more than 20% of your trading capital.
What do you mean by this?
So many basis points within basis points… inception! :15:[/QUOTE]
If a pair moves from 1.0000 to 1.0001 (one pip from par) it moved one basis point (1% of 1%). If a pair moves from 2.0000 to 2.0001 (one pip from twice par) it moved half a basis point (0.5% of 1%). The percentage move in the pair should be the ruler we are using (not pips). The simple way of saying it is as I said above, don’t lose more than x% on an x% move.
But that can be a bit hairy…
Suppose you want to trade EUR/JPY in a USD account and USD/JPY is currently trading around 118.990. That puts the value of a single pip move in EUR/JPY at about 8.4 cents per USD 1,000 traded. 8.4 cents is .84 basis points of 1,000. So if you have a 1,000 trading account and put on 1,000 units (one microlot) of EUR/JPY in a trade you are risking .84 basis points of your account value per pip (less than one basis point, 84% of a basis point).
EUR/JPY is currently trading around 131.130. Suppose you were in it from 131.130 and it moved roughly 1%, 132 pips from 131.13 to 132.45. The percentage change from 131.13 to 132.45 is 1.007% (roughly 1%). How much did your account change? If USD/JPY is still 118.900, then your account changed 8.4 cents per 132 pips which is $11.08. That is 1.108% of your account not 1% or even .84% of 1%! Why did it move more than 1% on a move of 1%? Because 1% of 131.13 is much more than 1% of 100.00.
Obviously we are all going to be doing some rounding and the smaller the account the more rounding one has to do. But if we wanted to risk 1% on a 1% move in the example above, we would need to buy 901 units in a $1,000 account. (1% of 1,000 is $10. 10/132=0.7575. 0.7575/0.84=.901. .901*1,000=901)
Obviously only traders with account sizes large enough to achieve a lot more granularity (account value to minimum lot size) will get deep into all of that, but that should not be ignored by new traders with smaller accounts. On January 15th, GBP/CHF moved from a high of 1.55463 to a low of 1.26112. That is an 18.879% move at best. But many traders lost more than 100% of their account. I lost 19.89% of my account in that pair and I didn’t even get in at the top and out at the bottom. (I was rounding my position size of course). But I am glad I didn’t lose twice the percentage change!!
I am not saying we have to be pencil perfect in adjusting our position size such that percentage changes in a pair produce the same percentage changes in our account. And I am certainly not advocating volatility and percentage adjustments intratrade (something done by many fund managers these days). I am of the old school trend follower mindset more like Jerry Parker. I welcome the intratrade compounding effect of greater and greater percentage gains. I am just saying we should be rethinking what we are doing if we are losing more percent in our account than a currency pair lost on its own.
That’s what they are told. “10 pips a day in one pair and be a millionaire by Christmas!” Show me someone who actually has done that. They all went broke before Easter. They went broke in January this year. A long term trend follower that held EUR/JPY long through 2013 bagged over 2000 pips in that pair alone. If they held AUD/NZD short all through 2013 they bagged another 1700 pips. USD/CNH gave up over 1300 pips that year holding short.
Diversified, long term, risk adjusted positions that prevent one from losing more of his account than the pair loses itself is the way to stay alive.
Trade a position size that will yield the same percentage as the move in the pair… alright, that makes sense…
If a pair moves from 1.0000 to 1.0001 (one pip from par) it moved one basis point (1% of 1%). If a pair moves from 2.0000 to 2.0001 (one pip from twice par) it moved half a basis point (0.5% of 1%). The percentage move in the pair should be the ruler we are using (not pips). The simple way of saying it is as I said above, don’t lose more than x% on an x% move.
Suppose you want to trade EUR/JPY in a USD account and USD/JPY is currently trading around 118.990. That puts the value of a single pip move in EUR/JPY at about 8.4 cents per USD 1,000 traded. 8.4 cents is .84 basis points of 1,000. So if you have a 1,000 trading account and put on 1,000 units (one microlot) of EUR/JPY in a trade you are risking .84 basis points of your account value per pip (less than one basis point, 84% of a basis point).
EUR/JPY is currently trading around 131.130. Suppose you were in it from 131.130 and it moved roughly 1%, 132 pips from 131.13 to 132.45. The percentage change from 131.13 to 132.45 is 1.007% (roughly 1%). How much did your account change? If USD/JPY is still 118.900, then your account changed 8.4 cents per 132 pips which is $11.08. That is 1.108% of your account not 1% or even .84% of 1%! Why did it move more than 1% on a move of 1%? Because 1% of 131.13 is much more than 1% of 100.00.
Obviously we are all going to be doing some rounding and the smaller the account the more rounding one has to do. But if we wanted to risk 1% on a 1% move in the example above, we would need to buy 901 units in a $1,000 account. (1% of 1,000 is $10. 10/132=0.7575. 0.7575/0.84=.901. .901*1,000=901)
Obviously only traders with account sizes large enough to achieve a lot more granularity (account value to minimum lot size) will get deep into all of that, but that should not be ignored by new traders with smaller accounts. On January 15th, GBP/CHF moved from a high of 1.55463 to a low of 1.26112. That is an 18.879% move at best. But many traders lost more than 100% of their account. I lost 19.89% of my account in that pair and I didn’t even get in at the top and out at the bottom. (I was rounding my position size of course). But I am glad I didn’t lose twice the percentage change!!
I am just saying we should be rethinking what we are doing if we are losing more percent in our account than a currency pair lost on its own.
I understand the broad message you are getting across here in that we should risk the % equal to the % equal in the market but I have come to the conclusion I don’t understand basis points or how this practically works…
Do you have any information/links perhaps explaining it in simple-ton terms starting with what a basis point is?
36.21% is thirty six percent and twenty one basis points.
52.93% is fifty two percent and ninety three basis points.
0.64% is just sixty four basis points.
The April 5th open for EUR/USD was 1.0980. The close was 1.0922. How much was that change? ((1.0922/1.0980)-1)=0.00528
0.00528 is 0.528%
The EUR/USD pair declined 0.528% from open to close on April 5th.
If you look back over time, the EUR/USD pair often moves by less than 1% on any given day. So rather than saying: “The eurodollar fell by zero point five two percent today.” We can say: “The eurodollar pair fell fifty two basis points today.”
Another example is Federal Reserve interest rates. Often it is said that the FED will change rates by so many basis points. Instead of saying “zero point two five percent” they say “twenty five basis points”.
When we diversify our trading so that any given trade moves our account value by just fractions of a percentage it is easier to speak in terms of basis points rather than percentage points.
I am not saying traders should fix every position they put on such that an x% move in a pair will alter their account value by that same percentage. I am just saying that should be the maximum or close thereto. If a trader sets up a position such that a 10% move in the EUR/USD will move his account value by 5%, that is just fine by me. It is when a 10% move will move his account value by 20% that I get uncomfortable and think: “You could spread that risk to somewhere else”.
At about 15:20 he tells why his firm was not effected much by the swiss move. He uses a minimum ATR in calculating his position size. Without getting into the nuts and bolts of ATR and how he uses it, it should suffice to say that he basically has a maximum position size regardless of what his calculations tell him to put on. Without mentioning the specific value of ATR he uses for his minimum, we can only speculate as to the maximum position size that he will take, but we can tell from what he says that it is such that[B] a 20% move in the swiss did not effect his fund by more than 1%[/B]. That is a much smaller position size than one that would fix his fund’s percent change to that of the percent change in that market.
Like the turtles (Jerry Parker is one), Rayner uses ATR to calculate his stop loss levels and his position sizes and discusses that in his Trend Following thread. I do not use that method, but we are using two different methods to do about the same job. It really doesn’t matter your precise method so long as you have a way of preventing your positions from getting big enough to wipe you out in one illiquid minute.
So a maximum position size that limits your account exposure to percentage changes no greater than those in any given market, a minimum ATR that limits your exposure to any given market, it doesn’t really matter how you do it.
The frightful truth is: even if you max your position out to have the same percentage effect on your account as a given percentage change in a specific market, if that market goes to ZERO so does your account! That is why I say that should be the maximum position you should put on if not lower.
[QUOTE=“tbarrows112;693500”] So if I’m correct… that’s 10,000 pips to lose all your capital? How do you calculate how much to risk per trade? Would you mind explaining how you managed it with ease? Is this simply a result of it taking a 10,000 pip move to wipe your account? Thanks[/QUOTE]
It would likely take more than 10,000 pips to wipe out my account as my initial entries are in direct relation to my net asset value. From a statistical perspective it’s mathematically impossible for me to bust my entire account.
I managed it because I wasn’t greatly exposed to it. The price action at that time was not conducive to be in the market at that time. Furthermore my portfolio essentially hedges itself. It’s rare that I’m ever in negative equity despite what’s going on. And even if I was, I would have roughly been hit by a ten to twenty percent decrease in my account.
Considering in January I took in 30+ percent and last month 8%, a 20% hit is recoverable.
But don’t take my word for it. I’ve been tracking all of my trades through Myfxbook for about six months now.
Totally agree with this post. I have different %SL-s for different purposes:
*0,3% (when SL in pips is less than 30, usually i trade on M15 for news events) it is so small 'coz the smaller TF you trade the worse hit rate you have (or maybe it is just true for me)
also news events can trick you or your broker also slippage: let’s say your SL order is 100 pips lower filled that you originally expected, the final result is that you lost appr. 1% it is defenetly over your plan, but still can be fixed with 1-2 good trade(s) so no permanent damage was made, you can easily move on…
*0,5% (when the structure requires more than 30 pips same scenario on M15, news events)
*0,5-1% (on H1-H4 for patterns I like to open trades with 3TPs (so i need at least a 3K position) so the %SL really depends on the SL in pips)
*1-1,3% (actually i had 1,3% risk only a couple of times on D1 candels because I have such a small account, sometimes i have to go beyond the 1% to be able to open a 1K position…I know it is risky, it is out my comfort zone, but there are some very beautiful set ups, I can not let them go)
Moreover I am planing to open another account 1 for daytrade-swing (M15-H1) and 1 for mid and long term (H4-W1) positions. This also gives an extra protection, (not if) when balck swan happens.
The problem with a lot of people is with their mindsets, they only see how much they can gain, not how much they can lose. I had my failures in the past and I am not willing to commit them again. I lost 3 accounts in a row, during 2 years, I have had payed my “tuition fees”.
I would recommend to everyone to read the Trading in the zone at least once, very useful reading as soon as you accept the fact that the market is not about you (it does not exist to satisfy your needs, it does not exist to trick you) you will see the market differently. The market is like weather sometimes it is in your favour sometimes it is not. Do not be affraid to make a mistakes but never go full retard. You either succeed or learn something. Michael Jordan -- \"Failure\"
Wouldn’t this thread be an entirely moot point if currency pairs were already quoted as a ratio, or as a percentage of two things? Isn’t the hypothesis being made here simply stating that over-leveraging is bad and that most traders are still risking too much per trade? Maybe I’m missing the point of the bps-over-pips argument altogether.
POST HOC - from what my limited mind is capable of interpreting, this thread [I]appears[/I] to making the argument that a trader’s account beta should be as close to 1.00 as possible; if this is correct, then OP’s main concern isn’t actually with bps or pips at all, but with gearing. If this actually is the case, wouldn’t traders be better off just using sharpe ratios to valuate their accounts instead of on-market percentages? You could even get fancy with it and use treynor ratios to incorporate your beta.
also slippage: let’s say your SL order is 100 pips lower filled that you originally expected, the final result is that you lost appr. 1% it is defenetly over your plan, but still can be fixed with 1-2 good trade(s) so no permanent damage was made, you can easily move on…