Excuse my niaivity but I have just started learning the basics of Forex trading this past couple of weeks, and have a query regarding risk and stop losses.
It seems that risking 2% of your account per trade is a common assertion, so wouldn’t having this as part of your money mangement strategy determine how many pips stop loss you coul have. For example, say I had $5000 in my account and I wanted 2% risk on a trade I.e. $100, would this mean my stop loss would be the maximum number of pips away (depending on the currency pair) that would equate to $100 loss?
If this is correct, is it a case of working out the maximum number of pips on the currency pair will allow for 2% risk and using this as your stop loss?
I’m very new to this so please don’t berate me for such a simple question. Thanks for your help and advice!
No it’s a good question to ask, you should be proud you’re even thinking about money management, a lot of new traders aren’t!
You should decide the placement of your stop based on the charts, like beyond support and resistance levels. This gives you a number of pips. Then you figure out what position size you can open so that when your stop is hit, you will have lost X% of your account.
2% is generally accepted, but personally I would recommend 1%, especially for a new trader.
Okay, so let’s assume my stop is say 100 pips away from entry, BEFORE I enter the trade I should work out what lot size I should enter with to give me the 2% (or 1%) risk value? Is this correct?
I am currently trading on a demo account with $5000 equity just to get the feel of things, and have just entered as the lot size “1” and consequently the losses I have sustained on two of my trades have been much more than the 2%!!! hopefully the paragraph above is correct and I should now be entering appropriate lot sizes on entry?
So how do people work all this out before entering their trade? Is it done manually I.e good old fashioned pen and paper, or does their charting package/broker work things out for them?
I am in the UK using Metatrader and Alpari - any advice on how best to manage my trade in terms of working things out before entry?
That’s good advice - I’m fairly handy with Excel so shouldn’t be too much of a stretch! I’m sticking to the top four majors at the moment so I’ll create a sheet for those four! Thanks
If you’re using metatrader, you can enable the DDE server to stream quotes into Excel. This will be necessary for the pairs that do not use USD as the quote currency (USDCAD, USDJPY, etc).
I would say 10 pips is too close for a stop loss, small fluctuations or spikes in the price would keep wiping out your positions before they run into profit.
Although it does appear to be a good idea to manage your risk as a percentage of your account balance, you probably need to figure out a minimum stop loss, probably somewhere closer to 100 pips
Yes, I would agree that 10 pips is too tight and even though I’ve only just started on this venture, I would think between a 30-100 pip stop loss range is what I’d be aiming for… obviously depending on the chart and levels of support/resistance. Thoughts on that?
I have yet to work out a formulurized stop loss strategy that actually works for me in practice, the only way I have managed to implement stop losses that dont cause trades that were about to become profitable to get wiped out is to use the stop loss as an absolute fail safe about 300 pips away in case I did something stupid like went to bed with a trade still open when I thought I had closed them all out, or forgot it was friday and had the market close on me while I had 6 positions open. (Yes I have done both those things) lol Or have the internet go down or my computer crash etc etc.
Maybe pick one or two of the majors and focus on them. It will help you with getting a feel for each pair. Sometimes looking at lots of pairs can be confusing …
I do tend to concentrate on the Euro/USD & GBP/USD but keep an eye on the two others in case any obvious patterns are occurring - good adice though to focus on two to begin with
consider trailing stops as part of your strategy, even though when I open a position I set a stop loss set quite far away due to the problems I mentioned in my other post, when my trade is reaching a level of profit I am happy with, I change my stop loss to a trailing stop and move it closer to lock in some of the profits already achieved and to automatically lock in more profits if the trade continues to run profitably, sometimes I adjust the trailing stop level several times moving gradually closer, and closer still if my trade reaches my target profit level.
Step 2 only works if the counter currency in the pair you’re trading is the same as your base account currency. i.e. GBP/USD if your account is in USD.
For other pairs, such as EUR/JPY, you need to consider the exchange rate between USD/JPY. So there’s an extra step in the calculation.
If you’re trading EUR/JPY in a USD account. You’re effectively doing EUR/USD * USD/JPY.
I similarly trade 1 system on the majors, and risk 1% of my capital per trade. When the broker is giving me the rates, there’s a line that tells me the minimum margin (ie: “Approx 24 pips with stop loss”). I take that into consideration before making a trade.
I should really put a newbie disclaimer here: I’m very new to this so could be talking utter tripe!
The smallest stop loss you can put on is 24 PIPS!!! Mine is 2+ spread, but my strategy is 9 out of 10 winners, but 24 PIPS, I really don’t know for a fact but that seems a bit dodgy to me, and don’t let me scare you you might well have a solid broker and it suits your strategy, it’s just like everything else really - question it question it and then ask just to make sure.
