The Rule of 72 and Risk | Forex Factory

Options

Permalinks
Print Thread

Similar Threads

Variable risk % versus fixed risk % 6 replies

Risk on, risk off, and big storms 7 replies

Rationale behind "Risk Per Trade" and "Risk/Reward Ratio"? 8 replies

risk appetite on - risk appetite off - how it affects the fx market? 11 replies

Risk Reward Ratio and Account Risk 30 replies

The Rule of 72 and Risk

  • #1
  • First Post: Sep 5, 2016 10:22am Sep 5, 2016 10:22am
The rule of 72: Divide your compounded interest rate into 72. That will give you the amount of time it will take for this account to double in size.

This is intended to be a risk discussion thread. Sharing of your own perspective is welcome, provided it's done in a respectable manner.

The ideas I share here, are my own, and are not intended to be any sort of "Rule, Law or Holy Grail", only thoughts which are here to open up discussions, in which I, or anyone else, may use to improve their own trading.

I may share some of my own trades, if I think they can expand on examples I talk about.

Darryl
  • #2
  • Sep 5, 2016 10:26am Sep 5, 2016 10:26am
Trading someone else's ideas, can help. However, the ultimate test is how the trader perceives & executes, but mostly, the traders emotional make up. If one is over leveraging, chances are, your emotions will wreak havoc on your trade, causing too early of an exit, or taking a loss bigger than your guidelines.

To combat this, for my self, I trade very small position sizes. A terrible trade gone bad for me now, is -1.5%. In a good day, I might make 3/4 of 1%. I am really happy to make 1/2 of 1%. I know if I can achieve 1/2 of 1% daily, four days per week, I can double my account in 36 weeks, if I use compounding, and adjust my trade size at the beginning of each week.

This is a simple formula called, "The Rule of 72". Take 72, divide it by your weekly percentage (2), and that will give you the answer.

Let's say you get 2% on savings (in US, not likely. South Africa, 7 to 10%), Divide your 2% into 72, and you now know how long it will take to double your compounded savings.

The point of all of this is to help curb your desires to make a quick buck. Those that advocate risking larger amounts (3 to 10%) per trade, do those from a point of either being EXTREME experts, themselves, or egotistically inflating their own ego. Even if they are experts, suggesting rookie risk 3% is IMO, not in the best interest of their followers.
  • #3
  • Sep 5, 2016 1:40pm Sep 5, 2016 1:40pm
On Friday I did trade NFP about one hour after the news. The point of this 4 minute video is show how I use tiny trade sizes. I only trade this pair, and mostly during New York morning, and on occasion, early Tokyo session.

Inserted Video
  • #4
  • Sep 5, 2016 8:47pm Sep 5, 2016 8:47pm
The rule of 72 works well for a known rate of interest or at minimum a very consistent rate of interest of which trading FOREX provides neither.
  • #5
  • Sep 5, 2016 9:39pm Sep 5, 2016 9:39pm
Quoting Winston Reed
The rule of 72 works well for a known rate of interest or at minimum a very consistent rate of interest of which trading FOREX provides neither.
++++++++++++++++++++++++++++++++

Thank you for your opinion.
  • #6
  • Sep 6, 2016 11:40am Sep 6, 2016 11:40am
Quoting diamonddbw
On Friday I did trade NFP about one hour after the news. The point of this 4 minute video is show how I use tiny trade sizes. I only trade this pair, and mostly during New York morning, and on occasion, early Tokyo session. https://www.youtube.com/watch?v=0p2Tw87G-ys

Hello Diamond,

200 units is indeed tiny, how much is your capital ?

also on the post before you said you are happy with 0.5% a day, of course it's very good after compounding, if consistent. But you also mentioned that a terrible trade gone bad is 1.5% ?! In 1 trade (not one day) you can loose 3 days of a happy reward (not 3 trades) ?! Am I correct ?

If I understood you correctly then I can understand why you trade such small size, but then aren't you inverting the problem ?
LDFX Trading Ltd
  • #7
  • Sep 6, 2016 6:19pm Sep 6, 2016 6:19pm
Hi LD.

I think I mentioned this in the video, but this acct is $400.

Yes, in fact I had one of those days last Monday, that set me back 1.25%. It took all week to re-coup.

Not sure what you mean by inverting the problem.

For right now, I'm trading strictly GJ, and have been for about one month. I, of course, tweak my approach as I see various price action tendencies. I'm seeing things I never noticed before, because I was spread too thin, watching multiple pairs for obvious clues. I liken it to hunting wild boar with a fly swatter.

I'm not advocating anyone begin doing what I, or anyone else says.
Good Hunting...
  • #8
  • Sep 6, 2016 7:08pm Sep 6, 2016 7:08pm
Quoting diamonddbw
{quote} ++++++++++++++++++++++++++++++++ Thank you for your opinion.
Not an opinion. A fact. The rule of 72 cannot be applied to Trading in general. But I'm interested in why you bring it up. Sorry for my bluntness but I'm not trying to be rude just want to understand. Thanks and good luck.
  • #9
  • Sep 6, 2016 7:30pm Sep 6, 2016 7:30pm
Quoting Winston Reed
{quote} Not an opinion. A fact. The rule of 72 cannot be applied to Trading in general. But I'm interested in why you bring it up. Sorry for my bluntness but I'm not trying to be rude just want to understand. Thanks and good luck.
++++++++++++++++++++++++++++++++


Cheers Winston.
Good question. Primarily, just to bring to light what compound interest can achieve, or destroy. If someone decides to use it as some sort of guideline for anything in their life, that could be a very good thing.

Factoid: In 1626, Manhattan Island was sold, by native Americans, to Dutch colonists for $24. One report I heard claimed that had the $24 been sitting around collecting 8% interest, per annum, it would now be enough money to purchase all property on the island.

Just hoping this info helps someone in their trade management. If not, no harm done.
  • #10
  • Sep 7, 2016 2:59am Sep 7, 2016 2:59am
Quoting diamonddbw
{quote} ++++++++++++++++++++++++++++++++ Cheers Winston. Good question. Primarily, just to bring to light what compound interest can achieve, or destroy. If someone decides to use it as some sort of guideline for anything in their life, that could be a very good thing. Factoid: In 1626, Manhattan Island was sold, by native Americans, to Dutch colonists for $24. One report I heard claimed that had the $24 been sitting around collecting 8% interest, per annum, it would now be enough money to purchase all property on the island. Just hoping this info...
so you lose 50% you need to make 100% to get back ... This is where most go wrong with the double edged sword of compounding. We have limited funds but the top is unlimited ... (Limited resources, unlimited wants ECO 101)

gotta build a base... Most go on a constant and tweak the initial outlay with the top in mind... This allows for higher risk which of course stokes the ego with higher reward

Seemingly constructive dreams of a modest 60% win rate and therefore X % etc but what about the inevitable 10+ trade loss streak... No one accounts for this and etc etc

when we are thrown with unexpectations psycologically we pay through undiciplined actions and theres your compound.. Etc etc

gotta build a base


Good honest trading thank you, make more videos... I will watch them

Cheers up
Time hides Nothing
  • #11
  • Sep 7, 2016 10:30am Sep 7, 2016 10:30am
Quoting CindyXXXX
{quote} so you lose 50% you need to make 100% to get back ... This is where most go wrong with the double edged sword of compounding. We have limited funds but the top is unlimited ... (Limited resources, unlimited wants ECO 101) gotta build a base... Most go on a constant and tweak the initial outlay with the top in mind... This allows for higher risk which of course stokes the ego with higher reward Seemingly constructive dreams of a modest 60% win rate and therefore X % etc but what about the inevitable 10+ trade loss streak... No one accounts...
++++++++++++++++++++++++++++++++

Thanks for the kind word on the video. Have been removing some of my videos, because I now see a few of them, as being crap.

I totally agree that dreams & reality don't always marry up that well. I think I've had as many as 16 straight losses, a few years back. However, I was Cowboy trading at the time. Homey don't do that anymore.

Regardless of losing streaks, as long as your risk is small, you will go broke much more slowly, or cruise along as you improve your skills.
  • #12
  • Last Post: Sep 25, 2016 10:34am Sep 25, 2016 10:34am
Still waiting on the new video

Have a crack

https://m.youtube.com/watch?v=qCuaPUVFbzg
Time hides Nothing
0 traders viewing now