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| risk management |
Example: I own a factory with one machine that produces 100 pounds of my product in a 24 hour period. The demand for my product increases, so I need to produce more product. My machine is already running at 90% of its capacity, 24/7.
Do I decide to run my machine at 180% to double my production?
NOT VERY SMART! The risk of ruin would be too great.
So - what's the smart thing to do?
I need to invest in a 2nd machine to double my production. |
First, I establish a certain (conservative) percentage of my trading capital as monthly (or annual) return on my money.
If my return (amount - not percentage!) is not enough, I need more trading capital and NOT increase my risk on every trade. |
My rule is not to lose more than 2% of the capital on a major entry signal and not more than 1% on a minor entry signal.
The calculation is simple:
My trade example: EUR/USD - buy - 60 pip stop-loss - 2% risk.
Capital: $1000 (works with any amount)
Capital (times) Risk (divided by) stop-loss
1000 x 0.0020 / 60 = 0.04 standard lots
1000 x 0.020 / 60 = 0.4 mini lots
1000 x 0.20 / 60 = 4 micro lots
When using this calculation it does not matter how far the stop-loss is from your entry price. You know that you cannot lose more than 2% of your trading capital. |
| Opt-fx - Dec. 21 at 08:08 AM |
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That's good to know - thanks |
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