How risky are your trades/positions?

Learn to Trade like the Banks

What margin do you enter trades with? How much of your capital do you ‘stake’ in the market? This right here is the topic most traders have chosen to ignore. This is the big elephant in the room that everybody in the room has chosen to ignore. Because of the ‘boring’ nature of the topic, most traders have chosen to ignore this vital component of trading and therefore have burnt their fingers in the Forex market to their detriment. Today, we are going to talk about the pertinent and yet, the most ignored component of trading successfully. Lets ride!

Before ever you take a position, it is important to determine how much of your margin you are willing to stake in the position. Most traders are always loss in the euphoria of the market and thus neglect doing their mathematics before taking positions. I have to be blunt with you; even if you are very good at analyzing the market but lack the risk management skills, at the long run, you will lose out of the market. It’s a certainty! Because, as a good you suppose to keep track of you trades; why you win or lose. A trader should articulate every of his moves. Nothing should be left to chance, otherwise, you are gambler; you can as well go to the casinos. But NO! We are talking about serious and ‘controlled’ activity, here. Happenings in the market cannot be controlled, but the effect of those happenings on your account can be controlled. Hence, this topic.

risk-forex

Risk and Money Management

Position Sizing

Chances are that you have come across this phrase in the past. But, you didn’t understand. Lets unravel this, shall we?
Position Sizing, basically, is the size of your size or amount of your position/trade. Did you get the drift, yet?
On a basic level, Position Sizing is the amount of money you are willing to risk in a position. Is it $100, $200 or $1000? You are prone to indiscipline when you calculate your risk, monetarily. So, how do you determine the amount of risk to take in a position. Did I hear you say, ‘percentage’? You are damn right. Now some argue that calculating you monetarily is better. I disagree!

Percentage sizing has a way of keeping a trader focus. For example, when a trader decides to take 2% risk on a position. He already knows from that ‘2% risk’ decision the amount he is willing to risk in a $10,000 account.The same with traders who have a $1,000 and $100 account respectively. It has a way of inculcating discipline in a trader. But, when a traders determines his risk, monetarily (or don’t at all), he tends to risk more in the market and thus give up easily.

Position Size Calculations

When a trader decides on the risk percentage, what next; How does he decides his lot size, stop loss level etc? Lets see…

Lot sizes determined you pip value. For instant, a 1.0 lot size position (standard lot size) means $10 per pip movement. Same with 0.1 and 0.01 which means $1 and $0.10, respectively.
So,when a trader decide to take 2% of $,1000 risk in a position, the simple math goes like;

 

2/100 * 1000 = $20

 

Another question will now be; how does the trader spread $20 on the pips risk?
Before a position is taken, expert traders have already decided the number of pips, in loss, a trade will get to and be liquidated. Lets assume this number of pips is 60. The trader will now decide to spread the $20 risk on 60 pip. Thus…

 

Amount risk/Pip risk = 20/60 = 0.6

 

There, you have your lot size for the position you want to enter; 0.06; This means that for every pip move (positive or negative), $0.60 (60 cent) is gained/lost.

However, calculating this can be tedious and herculean. Contact me for a software that does the calculation for you while you concentrate on your analysis.

In conclusion, taking position oblivious of the impact on your account is a surefire way to fail in the market. Putting it more bluntly, it can be referred to as gambling. In my 8 years career in the market, I have never seen a gambler who made it in the market. Study the article, make good trade decisions and become profitable.

Cheers!

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