Question about risk management

Beginner Questions
1

I’ve always wondered, when people say they risk X% on each trade, does that mean they only trade with a certain amount of their entire account? Or does it have something to do with where you place your stop loss as well?

Thanks.

2

Your stop-loss should be placed at a price based on TA which, if hit, indicates the reason for your trade is now wrong. e.g. you buy at price X because you believe it is more probable that price will go up: if price falls to Y, it will be more probable that price will fall instead: so you put your stop at Y.

Then you look at the distance from X down to Y and use the number of pips distance to calculate the amount of money you can afford to lose from your account. This is position sizing. Many people recommend 1-5% maximum: very few trade with over 10% of their account capital at risk.

If Y is so far below X that you cannot trade with a position size that means an account capital risk of less than 5%, do not take this trade.

7 Likes
3

Nice reply Tommor.:slight_smile:

4

First of all
Why Vlad
do you understand who he was ?

now, that aside…

You are asking about a SPECIFIC TYPE of risk management

so… When people say they risk X %

  1. Understand that “PEOPLE” Usually means… "NEWBIES who don’t know how to trade"
    THEN there is a small percentage that do know.
    Meaning the advice you usually get will not be reliable

  2. Assuming it comes from someone who knows how to trade,
    they are talking about Taking a Percentage of their Account balance so as to not risk the entire balance if the trade gets stopped out (hits the stop loss)

  3. does it have something to do with stop loss
    YES it does

so follow me on this ok

Calculation 1 - let’s assume you want to risk 1% of your account and you have a balance of $1,000
this means you are risking $10 ON THAT TRADE

but this alone is not enough

Calculation 2 - Knowing where to put your stop loss (too Close vs Too Far )
so… Where you put the stop loss WILL DEFINE YOUR LOT SIZE
and Your Lot Size will define how much you make or lose

so yes, it has everything to do with where you put your stop loss

here are 2 Examples

so, YOU ARE RISKING $10 on the trade

Stop Loss Scenario 1 (10 Pips Stop Loss)
so $10 / 10 pips = $1 Per pip, so your Lot size will be 0.10 Lots

but if you put your stop loss at 50 Pips
$10 / 50 pips = $0.20 cents so your Lot size will be 0.02 Lots

either way you are risking $10
but the father away your stop loss is , will mean you are MAKING LESS PER PIP if you win

so… in both scenari’s if your TAKE PROFIT is 10 pips away
Scenario 1 $1 Per pip x 10 pips = $10 Won
Scenario 2 20 cents per pip x x10 pips = $2won

but that’s only half the story
don’t forget to account for Nominal Margin requirement before calculation that 1% Risk
otherwise, you’re actually risking more than 1%

5

I can tell you how I calculate my risk %. I usually risk a total of 2% of my capital. It could be in one trade or two. Suppose my balance is 5000$. My risk amount will be 100$. And yes it is associated with stop loss. Depending on lot size, stop loss will vary. But the pips value should not cross 100$. Hope you get.

6

What I do is similar to Jamesfx9. My maximum risk % is 5%. A total of 5% consisting one to three trades. At a certain time I do not keep open more than three trades. In a certain period I can maximum lose 5% of my capital. Lot size depends on my capital size. For 5k$ it’s .05 lot maximum.