Some position sizing thoughts

Trading Discussion
1

Hi.
I recently finished the babypips school and now I’m working on developing my own trading system.
Right now I concentrate on the position sizing and risk management part.
My approach is, to place a stop loss order on every trade I make just under (or above) the random “noise”. With that stop loss I define my initial risk (1R).
When I know what my initial risk is, I can then size my position to a certain percentage of my available equity (in my case 1%).

For example, lets assume, that i go long on EUR/USD and place my stop loss 20 pips below the entry level. My risk is now 20pip per lot (100.000$). 1 pip is worth a 10$, so I risk 200$ per lot on this trade. Assuming my account is 10.000$ and I want to limit my risk to 1% of my equity, my position should be 0.5 lots (5 mini lots).

This is a different approach than that from the babypip school, where the total price of your position is considert as the initial risk.

What do you think about my thoughts on this very important subject?

2

With that stop/loss, chances are rather high
that you’ll get stopped out for losses way
too often than you care to.

3

that 20 pip was just for example…
that’s the way i calculate it too, first you define SL then you calculate lot size. I think that’s the way it should be done :slight_smile:

4

My initial stop loss is a function of the average true range of the last 14 bars.
This allows me to place my stop loss right beyond the random noise of the market.

I just testet it with MT4 and the results were promising.