DislikedHello DarkWolf,
You are doing a great job with PA. I dont know if you have answered my question in the past as I couldnt muster the courage to go through the 111 pages but I'd like to know your insight on money management, position sizing and the rationale behind your buy/sell stop placements. Any other members' contribution is welcomed. ThanksIgnored
Money management and position sizing is one of the most important aspects of trading.
Risk will vary from trader to trader depending on your accounts or your risk appetite. Some are comfortable with a high risk and some would simply prefer a lower risk. How much you decide to risk per trade will be a personal choice.
When you set your risk per trade you can choose to do this a number of ways with the most common either being a set risk percentage of your total capital or giving yourself a set dollar figure per trade that you are willing to risk.
Personally I use the percentage of total capital when I set my trades and this itself can sometimes vary depending on the type of trade I am taking and wether my entry is being aggressive or conservative. If I am taking a trade that I believe is a little bit more aggressive I will usually reduce my risk.
Ok now position sizing is the key behind all successful risk management strategies. If you do not get your position sizing right to match your risk then your potentially in trouble from the start.
So lets say you decide to risk 1% per trade, then it should not matter how large your stop loss size is as regardless if the stop is 100 pips or 20 pips the risk per trade will be the same as you are adjusting your position size and therefore your risk to match your stop loss size. You should not use your position size or risk to give you your stop position as this will most of the time simply put your stop in no mans land, in an area that there is no logical or technical reason for it to be there other than the fact that your stop loss size is telling you to. For example if you always trade with a 20 pip stop as the risk you take and the position size you use only allows for that, where is that 20 pip stop placement relevant on the chart ?
Ok so a $10000 account using a 2% risk model with a 100 pip stop will give you a position size of .20 lots
A $10000 account using a 2% risk model with a 40 pip stop will give you a position size of .50 lots
So the risk remains constant and yet the position size is variable adjusted to the size of your stop loss. These example figures may vary depending on the currency pair you are setting your trade to. These were calculated using a $10000 USD account taking a position on EURUSD.
Again, always use your stop loss size to set your position size, not your position size to set your stop placemnet.
Many traders will simply have the mindset that a large stop means larger losses as they dont understand position sizing. Position sizing will ensure that your risk will remain constant regardless of your stop loss size. In my opinion if you dont understand this concept then stop trading, walk away from your account until you do. There is hours of reading on the net about position sizing if you do a simple google search on the topic.
I hope this makes sense and if not let me know. The site that I use to calcutlate my position sizing for my trades is located at the following link. This calculator also gives you the option to swap the risk % with a $ amount if you so desire, this will calculate the position size to always equal the $ amount in risk.
http://www.earnforex.com/position-size-calculator
Now as far as stop loss placement. I like to simply place my stops in a logical area on the chart that is protected by some sort of support or resistance area. An area that when I look at the chart I believe that if price reaches or goes past this level that I no longer want to be in the trade.
For example if price is caught in a range and you take a short from the top of the range area then the most logical stop loss placement may be just above the top of the range or above the highs of of any false breaks from that current range. Your position size will then be calculated on the size of that stop to match your risk management criteria.
If you take a long position from a swing low then I would most likely place my stop below the low of that swing that I took the entry from.
The best and most simple way to look at stop loss placement is simply to look at the chart and decide where you think the most logical area is that if price breaches that area you no longer want to be in the trade.
I hope this clears a few things up for you, if not and you need any more info then please let me know.
Cheers.
DW
Twitter - DarkWolF@OzForexTrader - Facebook Page - link in post 1
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