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Need help with how to manage risk

  • Post #1
  • Quote
  • First Post: Mar 23, 2007 11:48am Mar 23, 2007 11:48am
Hi,

Sorry - a real basic question, but actually fundamental to each trading plan.

How do you manage risk in the FX market - If I give an example, could you fill in the blanks.

 

  1. GBPUSD
  2. My stop loss is 50 points away from my entry
  3. I have $10,000 capital
  4. I only want to risk 5% on each trade - ie. if my stop loss was hit on trade 1, I would only lose $10000 * 5% = $500


My question is this:

How many lots do I buy to achieve the above? I'm confused with how it works.

Thanks - alex

Quoting dac_uk

  1. GBPUSD
  2. My stop loss is 50 points away from my entry
  3. I have $10,000 capital
  4. I only want to risk 5% on each trade - ie. if my stop loss was hit on trade 1, I would only lose $10000 * 5% = $500

The calculation is $500 risk / 50 pips s/l x $10,000 = $100,000 or 1 std lot.
Tra-X
Quoting dac_uk
Hi,

Sorry - a real basic question, but actually fundamental to each trading plan.

How do you manage risk in the FX market - If I give an example, could you fill in the blanks.

  1. GBPUSD
  2. My stop loss is 50 points away from my entry
  3. I have $10,000 capital
  4. I only want to risk 5% on each trade - ie. if my stop loss was hit on trade 1, I would only lose $10000 * 5% = $500

My question is this:

How many lots do I buy to achieve the above? I'm confused with how it works.

Thanks - alex

First you would need to determine the value of 1 pip. For pairs where USD is the second currency (ie GBP/USD, EUR/USD) the value is a constant 1$ for mini lots. For other pairs it varies depending on the exchange rate. There are plenty of pip value calculators and explanations of how they are being calculated on the web just google it.
Once you have the value of a pip the rest is pretty simple.

Example for GBP/USD(pip value=1)
Balance:10000$;
Risk%:5%;
Stop:50;
Risk$:Balance*Risk%=10000*5%=500$;
Risk per Pip=Risk$/Stop/Pip Value=500/50/1=10;
PosSize=Risk per Pip*10000=10*10000=100000$ or 10 mini lots

HTH
Stubbornly persistent
Great - thanks.

Alex
  • Post #5
  • Quote
  • Edited at 5:42pm Mar 23, 2007 5:31pm | Edited at 5:42pm
And as you see from the above gentlemen, the RISK computation DOES NOT INCLUDE Leverage.

Risk is always computed LOTS x PIP VALUE x PIPS at risk. Leverage is never a part of it.

Either you be trading with 10:1 or 50:1 or 100:1 or even 500:1 leverage, the risk of 1 Lot will always be $10 per pip. No way, can 10:1 leverage make it smaller nor will a 500:1 leverage make it bigger.

Anyone telling you that HIGHER LEVERAGE = HIGHER RISK, ask them the math behind their statement. If they cant show the math, then its all hot air.
Understood.

Does 1 lot always = $10 for GBPUSD? If so, it makes risk calculation easy.
Quoting dac_uk
Understood.

Does 1 lot always = $10 for GBPUSD? If so, it makes risk calculation easy.
You're correct, but you're still missing one thing there (the per pip value).
1 standard lot (GBP 100,000) trade of GBP/USD means that you're risking USD 10 per pip value.
1 standard lot (USD 100,000) trade of USD/JPY means that you're risking JPY 1,000 per pip value.
1 standard lot (EUR 100,000) trade of EUR/GBP means that you're risking GBP 10 per pip value.
Hope that helps.
Tra-X
Quoting dac_uk
Understood.

Does 1 lot always = $10 for GBPUSD? If so, it makes risk calculation easy.
Depends on broker. Here is something I wrote long time ago. Pip value is for 1 lot.
L
Attached File
File Type: mq4 Spread.mq4   1 KB | 356 downloads
Everyone has offered a lot of great advice. I'd like to add one more from my personal experience. If you are just starting out, only risk half of what you think you should. Trade small. And then gradually increase it once you are consitently profitable.

I went from trading equities/options to Forex, and I wish I would have had that advice to start with.


Frank
I'm sorry but it sounds like you don't yet understand the math behind risk management. If this is the case, DO NOT TRADE with real money. You'll end up giving it all away.

Money Management is one of the most important aspects of trading. You have to get it right.

In my opinion, a 5% risk on a single trade is too high. You should be looking at risking no more than 1% per trade or even less if you are a beginner.

The risk is the size of your calculated stop loss. If your stop loss is 50pips then that 50pips should be no greater than 1% of your account balance.

I hope you do well, but trade very very small amounts to begin with.
Follow the money. Follow the money. Follow the money.
I made this simple tool in excel for calculating what my lot size (or what my stop size) should be. You can download it here:
http://www.forexfactory.com/showthread.php?t=20692
- it takes into account different pip costs for different pairs.

I usually risk 2-3% on my daily trades and 7% on my news trades.

Hope it helps!
That's great - many thanks for all your help on this.

Alex
  • Post #13
  • Quote
  • Last Post: Jul 21, 2009 8:55am Jul 21, 2009 8:55am
Guys, do you have an EA, where I can take some profit at a set pip value, eg at 10 pip and then let the rest of the lot run, with a trailing stop.
Eg enter the trade with volume 2,stop at 15 pips away, with trailing stop 15pips, and once 10 pips profit is reached, take one lot of profit and let the other lot run, with the trailing stop of 15pips...
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