Hi All
In my estimation, 80% of the threads on systems seem to discuss finding the best entry rather than discussing money management. To me this seems a little misdirected because even suboptimal entries can be very profitable with the right money management. More effort placed in managing money, calculating an optimal stoploss and limiting losses will result in greater long term profits for you.
When you hear phrases like "only risk 2%" what does this mean to you? Does it mean use 2% of your equity to buy currency? Does it mean only allow 2% of your equity to be at risk of loss? Does the amount risked include profits from open trades and how do you know what stoploss to use? If you have a stop loss of 30 pips, what should your lot size be? If you only want to risk 2% but need a 100 pip stop loss, what should your lot size be?
If you would like answers to these questions then perhaps the percentage of equity model might be for you.
Why use the percentage of equity mode?
Using this model, you only risk a percentage of your equity on each position which means your risk is proportional to your equity and provided you stick to stoploss you choose, are protected from financial ruin and only have the potential to loose the risked amount.
For example, using the spreadsheet attached, if you were risking 5% of $500 equity with a 40 pip stop loss your lot size would be .06 of a lot. If your equity was $100,000 with the same risk and stop loss your lot size would be 12.
So, by making sure that you allocate a percentage of equity to a trade and then determine the lot size from your stoploss pip size, you ensure that you trade with your eyes open and eliminate guesswork.
I use this sheet to calculate lot sizes for a trade from risk % and stoploss pips. It can be used for any currency pair but you would need to adjust the spread and pip value for your currency.
If the risk level is too high then adjust it accordingly. A wider stop loss reduces your profit and adjusts the lot size accordingly.
If you like to place a stop loss behind a fibo level or a support/resistance level then enter your stop loss pips into the spreadsheet and the spreadsheet will give you the corresponding lot size for your risk.
It assumes 1 standard lot is $100,000 so if you use a different lot size the adjust it accordingly.
How does it work?
It simply takes your equity, risk %, pip value, spread and stop loss to calculate the lot size. It also gives you 1/5 lot sizes so that you can place multiple orders for scaling in or out.
Example
You have $5000 in equity and wish to risk 5%. The pip value is $10 on a standard lot and your spread is 3 pips (EUR/USD). Your stop loss is 35 pips.
What should the lot size for your order be? Answer: 0.66 (approx).
The spreadsheet can also be used as a compounding ready reckoner to show how small gains (30 pips) can compound very quickly to significant returns.
I'm open to suggestions and ways to improve the spreadsheet so if you have any ideas or ways to make it better then please let me know.
The spreadsheet has a password to protect the formulas from being inadvertently changed so if you wish to change the formulas then unlock the sheet with 'password'.
Other calculators:
http://www.forexfactory.com/showpost...5&postcount=22
http://www.forexfactory.com/showpost...7&postcount=13
Regards,
TrevA
In my estimation, 80% of the threads on systems seem to discuss finding the best entry rather than discussing money management. To me this seems a little misdirected because even suboptimal entries can be very profitable with the right money management. More effort placed in managing money, calculating an optimal stoploss and limiting losses will result in greater long term profits for you.
When you hear phrases like "only risk 2%" what does this mean to you? Does it mean use 2% of your equity to buy currency? Does it mean only allow 2% of your equity to be at risk of loss? Does the amount risked include profits from open trades and how do you know what stoploss to use? If you have a stop loss of 30 pips, what should your lot size be? If you only want to risk 2% but need a 100 pip stop loss, what should your lot size be?
If you would like answers to these questions then perhaps the percentage of equity model might be for you.
Why use the percentage of equity mode?
Using this model, you only risk a percentage of your equity on each position which means your risk is proportional to your equity and provided you stick to stoploss you choose, are protected from financial ruin and only have the potential to loose the risked amount.
For example, using the spreadsheet attached, if you were risking 5% of $500 equity with a 40 pip stop loss your lot size would be .06 of a lot. If your equity was $100,000 with the same risk and stop loss your lot size would be 12.
So, by making sure that you allocate a percentage of equity to a trade and then determine the lot size from your stoploss pip size, you ensure that you trade with your eyes open and eliminate guesswork.
I use this sheet to calculate lot sizes for a trade from risk % and stoploss pips. It can be used for any currency pair but you would need to adjust the spread and pip value for your currency.
If the risk level is too high then adjust it accordingly. A wider stop loss reduces your profit and adjusts the lot size accordingly.
If you like to place a stop loss behind a fibo level or a support/resistance level then enter your stop loss pips into the spreadsheet and the spreadsheet will give you the corresponding lot size for your risk.
It assumes 1 standard lot is $100,000 so if you use a different lot size the adjust it accordingly.
How does it work?
It simply takes your equity, risk %, pip value, spread and stop loss to calculate the lot size. It also gives you 1/5 lot sizes so that you can place multiple orders for scaling in or out.
Example
You have $5000 in equity and wish to risk 5%. The pip value is $10 on a standard lot and your spread is 3 pips (EUR/USD). Your stop loss is 35 pips.
What should the lot size for your order be? Answer: 0.66 (approx).
The spreadsheet can also be used as a compounding ready reckoner to show how small gains (30 pips) can compound very quickly to significant returns.
I'm open to suggestions and ways to improve the spreadsheet so if you have any ideas or ways to make it better then please let me know.
The spreadsheet has a password to protect the formulas from being inadvertently changed so if you wish to change the formulas then unlock the sheet with 'password'.
Other calculators:
http://www.forexfactory.com/showpost...5&postcount=22
http://www.forexfactory.com/showpost...7&postcount=13
Regards,
TrevA
Attached File(s)
Percentage Equity Model.xls
92 KB

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