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Let's talk money management

  • #1
  • First Post: Feb 18, 2011 4:51pm Feb 18, 2011 4:51pm
Ok...so I have a system up and running.
Trading EUR/USD
Just started a demo account 5 days ago.

Four trades on the demo account totaled + 1452.00 usd (all fake money!)
trade qty = 1 lot each time.

Now it's time for some demo testing for a while.

I can imagine 1 lot losing $ 2,000.00 on a really bad news day.

So, with a demo account of $ 25,000.00 and 50:1 leverage, whats the right lot size to trade?
  • #2
  • Feb 18, 2011 7:04pm Feb 18, 2011 7:04pm
Quoting UgoDadeo
Ok...so I have a system up and running.
Trading EUR/USD
Just started a demo account 5 days ago.

Four trades on the demo account totaled + 1452.00 usd (all fake money!)
trade qty = 1 lot each time.

Now it's time for some demo testing for a while.

I can imagine 1 lot losing $ 2,000.00 on a really bad news day.

So, with a demo account of $ 25,000.00 and 50:1 leverage, whats the right lot size to trade?
trade what you will in real life.

i rather trade, and try not to lose 1000 for now trading 5 lots, in a 100 pip move i make about 60 bucks or so.
AVT INVENIAM VIAM AVT FACIAM
  • #3
  • Feb 18, 2011 8:40pm Feb 18, 2011 8:40pm
For me, it would depend on the setup. How far is my mental or hard stop away and how much will I risk? Stop thinking in terms of how much you will make, but how much you'll lose. The money will come with consistency and patience! Is the stop going to be 50 pips away, 100 pips away or 200 pips away? What am I willing to risk now?

If I determine that the stop is 50 pips away and I'm willing to risk $100, then I'd trade 20,000 units. However if I determined that my stop will be 100 pips away, I'd risk 10,000 units. I'd then shoot for my target take profit area.

Where will my take profit area be? Is this an ideal setup? Am I pissing in the wind and hoping I don't piss on myself? Ideally you'd want to risk 1 and get 2, but we don't always get what we want now do we? Taking profit is never bad, but ideally you'd want to get a greater than 1:1 risk reward ratio. It doesn't always happen though. You can always adjust your stop too and let her run.
  • #4
  • Feb 19, 2011 7:47am Feb 19, 2011 7:47am
Thank you for the perspective. Thinking in terms of stop-loss makes good sense. In the attached example, if my hard stop triggered, it would have realized a 88 pip or $ 880.00 + cost loss.

On a $25,000.00 account, this would be about 3.5 %. This strikes me as the upper end of the risk per trade range. What do you think?

On my demo, 1 lot = $ 10.00 per pip. Is this standard among brokers?
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  • #5
  • Feb 19, 2011 8:01am Feb 19, 2011 8:01am
Quoting UgoDadeo
Thank you for the perspective. Thinking in terms of stop-loss makes good sense. In the attached example, if my hard stop triggered, it would have realized a 88 pip or $ 880.00 + cost loss.

On a $25,000.00 account, this would be about 3.5 %. This strikes me as the upper end of the risk per trade range. What do you think?

On my demo, 1 lot = $ 10.00 per pip. Is this standard among brokers?

lot = $10 per pip ($100,000)
mini lot = $1 per pip ($10,000)
micro lot = $0.10 per pip ($1,000)
nano lot = $0.01 per pip ($100)

Do not start out trading a full lot. You need to prove your method first. Most brokers offer micro lots and some offer nano lot. Once you determine your method works with a lower lot size you can always go to bigger lot sizes or just increase the number of nano - micro - mini lots.

The last thing you want to do is trade with a full lot, lose 25k only to find out you should have traded with a smaller lot size.
  • #6
  • Feb 19, 2011 8:14am Feb 19, 2011 8:14am
Quoting UgoDadeo
Thank you for the perspective. Thinking in terms of stop-loss makes good sense. In the attached example, if my hard stop triggered, it would have realized a 88 pip or $ 880.00 + cost loss.

On a $25,000.00 account, this would be about 3.5 %. This strikes me as the upper end of the risk per trade range. What do you think?

On my demo, 1 lot = $ 10.00 per pip. Is this standard among brokers?


I don't recommend anyone start off with $25k and trade standard lots.
  • #7
  • Feb 19, 2011 8:17am Feb 19, 2011 8:17am
UgoDadeo, alot of traders will also take on a trade with a tight stop loss only to see that the trade eventually goes in their favor. Remember most trades will have draw down too, so you have to give your trade some wiggle room. Very seldom will a trade immediately go into profit and stay there.
  • #8
  • Feb 19, 2011 8:55am Feb 19, 2011 8:55am
What levels do you guys set stop loss vs take profit? Does it depend on the trade? Or do you follow a fixed system?
  • #9
  • Feb 19, 2011 9:02am Feb 19, 2011 9:02am
I'll start with 2 minis or .2 for the qty.
If I build comfort with the system, I'll move to .5 units.

The trick will be staying on demo for 2 months.

Does anybody really resist going live after two weeks of demo trading?
  • #10
  • Feb 19, 2011 5:54pm Feb 19, 2011 5:54pm
For me, it depends on the trade. I trade on D1 and H4, so my stop will usually be around 50 - 100 pips away from entry.



Quoting 22pipsup
What levels do you guys set stop loss vs take profit? Does it depend on the trade? Or do you follow a fixed system?
  • #11
  • Feb 19, 2011 7:07pm Feb 19, 2011 7:07pm
i dont know if its just me but in forex the stop loss needs to be a lot looser.

for example if you place a stop loss below support area, or at a good place that goes according to risk reward ratio. most likely the market if you are trading daily charts seems to magically look for stop loss areas before moving in the original area of the trend
AVT INVENIAM VIAM AVT FACIAM
  • #12
  • Feb 20, 2011 5:32am Feb 20, 2011 5:32am
Quoting UgoDadeo
The trick will be staying on demo for 2 months.

Does anybody really resist going live after two weeks of demo trading?
I think this comes down to experience. Once you've been trading for several years and got several 1000 hours of chart time you just "know" when it's worth the risk.
  • #13
  • Feb 21, 2011 1:52am Feb 21, 2011 1:52am
Quoting UgoDadeo
So, with a demo account of $ 25,000.00 and 50:1 leverage, whats the right lot size to trade?
The calculation is:

#lots = Acct_ size$ x %risk_per_trade x 0.1 / stoploss_pips

Example:
Acct_size$ = $25,000
%risk_per_trade = 2% = 0.02
stoploss_pips = 50 pips from entry

Result = 25,000 x 0.02 x 0.1 / 50 = 1 lot.

In other words, if you're comfortable risking 2% (that's $500 loss per trade), with a 50 pip SL, then 1 lot is a reasonable pos size for a $25k account.

Plug in your own numbers and get your own result.

Leverage is irrelevant, and merely determines whether or not you have the margin needed to make the trade.
  • #14
  • Feb 21, 2011 10:27am Feb 21, 2011 10:27am
Quoting hanover
Leverage is irrelevant, and merely determines whether or not you have the margin needed to make the trade.
Except if you scale in and trade a basket of pairs.

If leverage was irrelevant there would be no rule of 50:1 impeding you.
  • #15
  • Feb 21, 2011 9:24pm Feb 21, 2011 9:24pm
Quoting pip_seeker
If leverage was irrelevant there would be no rule of 50:1 impeding you.
If you find 50:1 restrictive then you must be trading sizes that could potentially cause large equity swings. Even with a basket trading strategy, one must take forex's high degree of correlation into account.

5:1 is usually adequate for total exposure of 2%-3%, unless you're scalping with tight stoplosses.

Anyway, no matter, what I was saying is that leverage had no direct bearing on the risk calculation that I gave.
  • #16
  • Feb 22, 2011 4:19pm Feb 22, 2011 4:19pm
Thank you for the example. It's very helpful.

I spent some time over the weekend thinking about the smaller lot size and keeping risk below 2%. If a system has "flip of the coin" chances of a win or around 50% and the R:R averages a little over 1:1, then couldn't you take larger positions? Say risk of around 5% or so.


Quoting hanover
The calculation is:

#lots = Acct_ size$ x %risk_per_trade x 0.1 / stoploss_pips

Example:
Acct_size$ = $25,000
%risk_per_trade = 2% = 0.02
stoploss_pips = 50 pips from entry

Result = 25,000 x 0.02 x 0.1 / 50 = 1 lot.

In other words, if you're comfortable risking 2% (that's $500 loss per trade), with a 50 pip SL, then 1 lot is a reasonable pos size for a $25k account.

Plug in your own numbers and get your own result.

Leverage is irrelevant, and merely determines whether or not you have the margin needed to make the trade.
  • #17
  • Feb 26, 2011 1:30am Feb 26, 2011 1:30am
Quoting UgoDadeo
Thank you for the example. It's very helpful.

I spent some time over the weekend thinking about the smaller lot size and keeping risk below 2%. If a system has "flip of the coin" chances of a win or around 50% and the R:R averages a little over 1:1, then couldn't you take larger positions? Say risk of around 5% or so.
This is arguably conservative, but personally I would not exceed 1%-2% risk per trade unless I had a profit factor of at least 1.4

You could use a Monte Carlo approach (like this simulator) to get a feel for how much drawdown your results are likely to create.

The attached XLS calculates the probability of X consecutive losses from N trades, for a given win rate. Many folk are surprised at how high the probabilities are. Also, keep in mind that these are consecutive losses, e.g. a sequence of L-L-L-W-L-L-L-W-L-L-L-W-L-L-L has a max of only 3 consecutive losses in 15 trades but would make significant inroads into your account (nearly 40% drawdown) at 5% risk per trade.

Bottom line: it's a personal decision as to how much drawdown you're willing to tolerate.
Attached File(s)
File Type: xls Probability of X consecutive losing trades.xls   30 KB | 356 downloads
  • #18
  • Feb 26, 2011 1:56am Feb 26, 2011 1:56am
One of the most important things I have learned in Forex is that you need to start small.

This is a hard business and things don't come easy as most new people quickly find out.

I would recommend starting out with 0.01 for every $100 and nothing higher, until you have learned how to get past the psychological barriers that your mind will put up for you.
  • #19
  • Feb 26, 2011 6:13am Feb 26, 2011 6:13am
That chart drives the point home! Thanks.

I like the idea of tying the lot size to the R:R. I'm going to add this idea to the formula you provided earlier.


Quoting hanover
This is arguably conservative, but personally I would not exceed 1%-2% risk per trade unless I had a profit factor of at least 1.4
  • #20
  • Feb 26, 2011 7:52am Feb 26, 2011 7:52am
Here is a good book. Its money management lesson worth the price.

http://ecx.images-amazon.com/images/...SH20_OU01_.jpg
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