What risk per trade should it go with? | Forex Factory

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What risk per trade should it go with?

  • #1
  • First Post: Mar 22, 2011 3:53am Mar 22, 2011 3:53am
Hello. I have 1K live account.I have a profitable strategy.

Stop loss: 50 pips.

Take profit: 100 pips.

Profit Factor: 5.5

Currency pairs: GBPUSD and EURUSD

2-3 trades per day.

Leverage: 1:100

Trade duration London and New York sessions.

Thank you for advices.
  • #2
  • Mar 22, 2011 3:54am Mar 22, 2011 3:54am
And more, my target - 20% per month.
  • #3
  • Mar 22, 2011 4:56am Mar 22, 2011 4:56am
It's not difficult to calculate that if you need 20%/month and are doing 2-3 trades per day (2.5 average) or 50 trades/month, then you have to make about ~0.4% average on each trade. Considering your profit factor is 5.5, you can risk 0.089% per trade and you still will be making 0.4% profit on average trade.
  • #4
  • Mar 22, 2011 8:08am Mar 22, 2011 8:08am
How much pips per month do you make with your strategy?

If you make 400 pips - you can calculate the value of each pip.

Balance - $ 1000 20% = $ 200 $ 200 = 400 pips 1 pip = $ 0.5

So the lot size for each trade should be 0.05

Am I right?
  • #5
  • Mar 22, 2011 8:25am Mar 22, 2011 8:25am
A profit factor of 5.5 with 2:1 r/r ratio?!?

How big was your sample of trades to calculate this profit factor?
  • #6
  • Mar 22, 2011 8:38am Mar 22, 2011 8:38am
It is great that you have a profitable strategy. That is a solid beginning. You want to live to trade it now consistently over time. That means that you want to look at the downside more then the upside. You may have a high win rate but you will have losers. It is inevitable. Also, you do not know how many losers in a row that you may have. It could be 2,4, 6 or even 10.

I can hear you now. "He doesn't know my strategy. He doesn't know how good I am". Perhaps but it doesn't matter. There is always a probability of X number of losses in a row and you have no idea when that string of losses will occur. So, you protect against it.

Risk 1% max. You use a fixed SL of 50 pips. So 1%*Equity = 1%*1000 = $10. $10/50 = $0.2/pip so for the GU and EU pairs use 0.02 lots.

I don't use fixed SL but rather previous swing highs or swing lows but I am just using the scenario you presented.

If you know your win rate and therefore losing rate then you can calculate the probability of X numbers of losers in a row and therefore your drawdown. It is always a good exercise to do.

Also, just based on your numbers and not knowing anything about the validity of your numbers (taking them on pure trust), you do not need to risk more then 1% and you will grow well. It is a marathon not a sprint.

But you can ignore the above if you wish to shoot for the moon.


Quoting Oliver_Chart
Hello. I have 1K live account.I have a profitable strategy.

Stop loss: 50 pips.

Take profit: 100 pips.

Profit Factor: 5.5

Currency pairs: GBPUSD and EURUSD

2-3 trades per day.

Leverage: 1:100

Trade duration London and New York sessions.

Thank you for advices.
  • #7
  • Mar 22, 2011 8:51am Mar 22, 2011 8:51am
Quoting Lonestar
A profit factor of 5.5 with 2:1 r/r ratio?!?

How big was your sample of trades to calculate this profit factor?
158 trades. The point Full stop loss is very rare.
  • #8
  • Mar 22, 2011 8:53am Mar 22, 2011 8:53am
Further to the above if you want to know the probability of X number of losses in a row and the probability of a certain drawdown then use these equations:

Prob X losses in a row = (1-winrate)Power X
which can also be stated as = (LoseRate)Power X
so at 70% winrate therefore 30% Lose Rate and you want to know probability of 3 losers in a row then:
(1-.7)Power 3 = (0.3)Power 3 = (0.3)*(0.3)*(0.3)=2.7%

How much drawdown at that number above...

DD = 1-(1-risk%)Power X
DD = 1-(1-.01)Power 3
DD = 1 - [(.99)*(.99)*(.99)]
DD = 1 - [.9703]
DD = 2.97%

So you have a 2.7% probability of having 3 losses in a row which will lead to a 2.97% drawdown. This assumes 70% winrate and 1% risk. Create a spreadsheet and model your risk, drawdown based on various risk profiles and see what you are comfortable with.
  • #9
  • Edited 9:42am Mar 22, 2011 9:07am | Edited 9:42am
Quoting Lonestar
A profit factor of 5.5 with 2:1 r/r ratio?!?

How big was your sample of trades to calculate this profit factor?
Thank you for replies and advice. Appreciate that my friends.

One, I know it is very stupid question - How not to trade with bigger lot size?

Ok. I have 1k one my account. So I can trade, theoretically, with 1 lot per trade. So my account will grow fast. This 1k is my risk capital, I can fire it up. So what you will say?
  • #10
  • Mar 22, 2011 9:58am Mar 22, 2011 9:58am
Quoting flyer415
It is great that you have a profitable strategy. .....
Great post.

Risk management is more important than return. One of the most important lessons that I've ever learned.
  • #11
  • Mar 22, 2011 10:13am Mar 22, 2011 10:13am
Quoting hanover
Great post.

Risk management is more important than return. One of the most important lessons that I've ever learned.
I do think that is the lesson you can give nobody. Everyone has learn it independently.
  • #12
  • Mar 22, 2011 10:14am Mar 22, 2011 10:14am
Quoting Oliver_Chart
Ok. I have 1k one my account. So I can trade, theoretically, with 1 lot per trade. So my account will grow fast. This 1k is my risk capital, I can fire it up. So what you will say?
Do the math. Your SL is 50 pips. Trading one full lot is $10/pip (on xxxUSD pairs). Therefore your risk = 50 x $10 = $500 per trade. If your first two trades are losses you will have blown your whole account.

My rule of thumb is 1 lot per $25k account size. For a 50 pip SL, that works out at around 2% risk per trade.
  • #13
  • Mar 22, 2011 10:50am Mar 22, 2011 10:50am
i'd say at most 1% per trade.
  • #14
  • Mar 25, 2011 4:32am Mar 25, 2011 4:32am
Quoting qwertymyfx
i'd say at most 1% per trade.
Should 1% be the trade size, or should I count only stop loss. If I have stop loss I'll lose 1% of my total account balance?
  • #15
  • Mar 25, 2011 6:25pm Mar 25, 2011 6:25pm
Quoting Oliver_Chart
Hello. I have 1K live account.I have a profitable strategy.

Stop loss: 50 pips.

Take profit: 100 pips.

Profit Factor: 5.5

Currency pairs: GBPUSD and EURUSD

2-3 trades per day.

Leverage: 1:100

Trade duration London and New York sessions.

Thank you for advices.
2%,i.e ,$20 risk per trade divided into your s/l.
50 pip s/l equals $0.40 per pip.
  • #16
  • Mar 28, 2011 12:09am Mar 28, 2011 12:09am
You should start with the smallest risk amount that will allow you to scale out of a position. You should start off trading with R = $10, which will frequently allow you to scale out of your position with at least 1/2 of your position.

If you cannot be consistently be profitable with R = $10 then you will not be profitable at larger lot sizes. Make some consistent gains at that level, then come back for more advice from the Forex traders here. Don't burn up your account trading anything larger than you can handle.
  • #17
  • Mar 28, 2011 2:54am Mar 28, 2011 2:54am
Quoting Jcsuits
You should start with the smallest risk amount that will allow you to scale out of a position. You should start off trading with R = $10, which will frequently allow you to scale out of your position with at least 1/2 of your position.

If you cannot be consistently be profitable with R = $10 then you will not be profitable at larger lot sizes. Make some consistent gains at that level, then come back for more advice from the Forex traders here. Don't burn up your account trading anything larger than you can handle.
Thanks, Can you recommend me Broker with micro accounts and paypal deposit?
  • #18
  • Mar 29, 2011 2:12am Mar 29, 2011 2:12am
Hi
this is my first post, and my english is not good as u. But i'll do my best

I want to help u. I attached risk management file, just put ur initial capital.
I hope that will help.
Attached File(s)
File Type: xls Risk management.xls   25 KB | 537 downloads
  • #19
  • Mar 29, 2011 9:00am Mar 29, 2011 9:00am
Quoting Knight515
Hi
this is my first post, and my english is not good as u. But i'll do my best

I want to help u. I attached risk management file, just put ur initial capital.
I hope that will help.
That is actually pretty good risk management.

http://img847.imageshack.us/img847/396/18370093.png
  • #20
  • Mar 29, 2011 10:38am Mar 29, 2011 10:38am
Quoting Oliver_Chart
Thanks, Can you recommend me Broker with micro accounts and paypal deposit?
Response: I trade through an institutional trading firm, so I trade the firm's capital rather than an independent account. So, unfortunately I don't have much info on the best broker to go with for an independent account that offers microlot trading. I'm sure other traders in this forum would have some good suggestions on a broker. Another thing to consider is finding a broker that offers a practice account so you can trade on a simulator until you show some consistency. Good luck with your trading.
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