First post on here, love the site, love the Pipsology school, just had a question on Risk percentage,
When do I recalculate my original 1% risk value as my account grows and shrinks?
For example, if I start with £10,000 capital and my trading strategy allows me to risk 1% per trade (or £100) and I lose 10 trades in a row, I now have £9,000. So 1% would now be £90. Opposite scenario is if I win my first 10 trades and would then have £11,000, 1% would be £110.
My understanding is that it doesn’t change as your account decreases, so you are always risking 1% of your initial capital, even if your account balance has decreased. And it would be up to the individual when they decided to recalculate that 1% value as their account increases, and potentially make the most of compounding profits.
I might have answered my own questions but hoping someone can tell me i’m wrong if I am, or if there is any known common structure to managing this.
The percentage risk is calculated from the account total capital at the point the trade is opened, regardless of the original amount of funds deposited.
therefore, after 1 losing trade with a 1% risk, you would have £9900 remaining but your second trade would only risk 1% of this figure, i.e. £99. After 10 consecutive losing trades with 1% risk each, you would have £9043 remaining. After 10 consecutive winning trades, at risk:reward ratio of 1:1, you would have £11046 in the account.
Actually, I might have inadvertently laid a little trap.
From my figures, it looks like the strategy is slightly positively skewed because with 10 losers you’re down £956 but after 10 winners you’re up £1,046. But that only works if you start each series of 10 from £10,000. If you start from £10,000 and run 20 trades, of which 10 are winners and 10 are losers, then regardless of the sequence you will be out of pocket.
Got it cheers, the reason I’m asking is as I’ve been learning I’ve heard a lot of people saying for example ‘if your risk is 10% a trade and you lose 10 trades you’ll wipe your account out’. But that wouldn’t be true as your 10% would be relative to your balance before each trade. Am I right in saying that?
Its mathematically untrue so it would never literally wipe out an account. But in practical terms your account would eventually be so damaged that you would be unable to trade back up to the original balance.
managing risk is a great skill in Forex trading , generally we always try to keep risk ratio under 5% , but honestly speaking for all time to maintain same risk is not possible at all.