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Author Topic: Risk Calculation Practise and Information  (Read 6600 times)

Offline donnaforex

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Risk Calculation Practise and Information
« on: January 30, 2011, 07:19:37 PM »
As per my newsletter this week, this topic is for anyone who wants to test out their risk calculation skills (working out what lot size to trade to risk a set % of your account - eg, if i have a $10k account and want to risk 5% on EURUSD with a stoploss of 75, what size must i trade at?).

Post your calculations here and someone will be along to check them over for you. Don't be shy, and don't worry about messing it up, this topic is here to help. Feel free to ask questions -- and if you are a more experienced trader feel free to lend a hand here too helping others.
Note: Don't panic if you are seeing this before receiving my newsletter, i'm actually posting it a few hours beforehand, you are just quick off the mark ;)

-------------------------
-------------------------
Article on Risk Calculation Taken from my newsletter (with extra bit on the end which wouldn't fit in the newsletter!)


How do I calculate what size to trade at if I know I want to use 2% risk (I don't want to lose more than 2% on my next losing trade!)?               
This does involve a little maths i'm afraid!  I'll try to answer as simply as I can though.

1. You need to find out what 2% actually is.  To show you the calculation I'm going to use an example of a $2,000 account.  Here it is:-

($2,000 / 100) X 2 =  $40

In very simple terms, just take your account size, divide it by 100, and then multiply your answer by your risk size in percent. The answer here is $40, which is the most we want to lose on a bad trade.

2. Now write down your stoploss value in pips. Let's say for this our stoploss is 30 pips. If your strategy uses variable stoplosses, use the 'worst case scenario' stoploss (the highest value).

3. Divide your risk amount by the stoploss value to find out how many $ per pip you can trade:-

$40 / 30 =  $1.33 per pip

4. Now work out what that is as a lot size. This is very simple if you are trading a USD pair (eg EURUSD) and your account is in USD, you simply divide by 10 :-

$1.33 / 10 = 0.13 lots

You can also divide by 10 if your account is in the same currency as that which you are trading, eg a GBP account trading a GBP currency (it is the SECOND currency in the pair that has to match, eg for USD accounts you can divide by 10 on any of the USD pairs such as EURUSD, GBPUSD - and for GBP accounts you can divide by 10 if you are working with EURGBP for instance).

If the second currency in your pair is different to your account currency, this is a little harder, although you can usually use the above method to approximate if you wish, just remember that it won't be exact.

5. The longer way of working it out for currencies not the same as your account currency...

I need to change our example a little here to a different currency. We calculate up to point 3. above as normal. Let's say our calculation is in GBP and comes to a figure of 1.50 and I want to trade the EURUSD pair.

a. Convert 1.50 into the correct currency for the pair (USD in this case because it's EURUSD). To do this you need to find out the recent exchange rate. You can get this data off your chart, or to make life easier you can simple go to google.com and type into the search "1.50GBP in USD" - obviously replace the values with what you need to work out. Google will return to you the value, in this case 1.50 is worth $2.38.

Note: These values will fluctuate! Currencies are moving all the time so you will need to recalculate via this method periodically to ensure you stay on course, i'd suggest recalculating your risk at least every 2 weeks. Risk calculations are only 100% accurate when they are for pairs in the same currency as your account balance.

b. Now apply the divide by 10 rule

$2.38 / 10 = 0.23 lots

Note: Normally when you are rounding numbers, you'd round 0.238 up to 0.24, not down to 0.23 as I have done. However, we are working with risk here, and if you round your figures up remember you are actually risking more than 2% now! For that reason i ALWAYS round my figures down.

Note: JPY pairs (GBPJPY, USDJPY, etc)

You cannot use the divide by 10 rule for JPY pairs. You must divide by 1000 instead in stage 4 or 5 above.

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Offline Easy EA

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Re: Risk Calculation Practise and Information
« Reply #1 on: February 17, 2011, 10:57:16 AM »
Hi Guys,

We've built a handy little indicator which does everything that Donna has described above.  We've uploaded it as a free download onto a new website of ours that we acquired towards the end of last year.

The indicator is open source and anybody here is welcome to download it for free.

Its operation is very simple.  You just enter the risk to your account equity that you are prepared to accept, together with your stop distance in pips, and the indicator will calculate the lot size of your trade for you.

It automatically compensates for 3/5-digit brokers, so if you want a 30 pip SL you should enter 30 and not 300 and leave the indicator to make the adjustment.  The other thing that it does is to adjust for your broker's minimum lot size and lot increment.  Let's suppose that the indicator calculates that your intended lot size for a risk of 3% is 0.02 lots, but your broker doesn't allow micro lots and his smallest lot size is 0.1 lot, then the indicator will tell you on screen what the actual risk is that you will be taking (in this example, 15%).

Finally, it also calculates lot sizes on the basis that the stoploss is at a fixed level, such as underneath a recent low or just outside a trendline.  As an example, let's suppose cable is at 1.6150 and you want a SL at 1.6100.  As the price moves up or down, the SL distance will constantly change more or less than the initial 50 pips.  The indicator will update itself with every price change to ensure that you take a smaller trade as the SL distance increases and a larger trade as the SL distance reduces.  It also draws a line on the screen at the SL level you choose so there can be no confusion that you may have entered the SL level incorrectly.

You can play about with the colours of the display and, if you don't want to use either of the two methods described above, you just set the value to 0 (zero) and nothing will display.

Being open source, you can modify the code as you wish to suit your own preferences.  For instance, you could change the font or size or position of display, or you could use the account balance instead of equity in the calculations if you wished.

Before anyone asks, we've cleared it with Donna beforehand to make this post because we're aware of her rules on vendors advertising.  We hope you find the indicator useful but, because it's free, we don't really have the time to offer one-to-one support I'm afraid.  I suggest that if anybody's got any questions about the Lot Calculator, they post them up here and I'll try to answer.

Oh, nearly forgot, here's the free download link:

http://piprider.com/free.htm

And this is what you get to see in your chart window.



Offline JoshTaylor

  • Jr. Member
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  • Posts: 26
Re: Risk Calculation Practise and Information
« Reply #2 on: October 17, 2012, 01:23:57 AM »
As per my newsletter this week, this topic is for anyone who wants to test out their risk calculation skills (working out what lot size to trade to risk a set % of your account - eg, if i have a $10k account and want to risk 5% on EURUSD with a stoploss of 75, what size must i trade at?).

Post your calculations here and someone will be along to check them over for you. Don't be shy, and don't worry about messing it up, this topic is here to help. Feel free to ask questions -- and if you are a more experienced trader feel free to lend a hand here too helping others.
Note: Don't panic if you are seeing this before receiving my newsletter, i'm actually posting it a few hours beforehand, you are just quick off the mark ;)

-------------------------
-------------------------
Article on Risk Calculation Taken from my newsletter (with extra bit on the end which wouldn't fit in the newsletter!)


How do I calculate what size to trade at if I know I want to use 2% risk (I don't want to lose more than 2% on my next losing trade!)?               
This does involve a little maths i'm afraid!  I'll try to answer as simply as I can though.

1. You need to find out what 2% actually is.  To show you the calculation I'm going to use an example of a $2,000 account.  Here it is:-

($2,000 / 100) X 2 =  $40

In very simple terms, just take your account size, divide it by 100, and then multiply your answer by your risk size in percent. The answer here is $40, which is the most we want to lose on a bad trade.

2. Now write down your stoploss value in pips. Let's say for this our stoploss is 30 pips. If your strategy uses variable stoplosses, use the 'worst case scenario' stoploss (the highest value).

3. Divide your risk amount by the stoploss value to find out how many $ per pip you can trade:-

$40 / 30 =  $1.33 per pip

4. Now work out what that is as a lot size. This is very simple if you are trading a USD pair (eg EURUSD) and your account is in USD, you simply divide by 10 :-

$1.33 / 10 = 0.13 lots

You can also divide by 10 if your account is in the same currency as that which you are trading, eg a GBP account trading a GBP currency (it is the SECOND currency in the pair that has to match, eg for USD accounts you can divide by 10 on any of the USD pairs such as EURUSD, GBPUSD - and for GBP accounts you can divide by 10 if you are working with EURGBP for instance).

If the second currency in your pair is different to your account currency, this is a little harder, although you can usually use the above method to approximate if you wish, just remember that it won't be exact.

5. The longer way of working it out for currencies not the same as your account currency...

I need to change our example a little here to a different currency. We calculate up to point 3. above as normal. Let's say our calculation is in GBP and comes to a figure of 1.50 and I want to trade the EURUSD pair.

a. Convert 1.50 into the correct currency for the pair (USD in this case because it's EURUSD). To do this you need to find out the recent exchange rate. You can get this data off your chart, or to make life easier you can simple go to google.com and type into the search "1.50GBP in USD" - obviously replace the values with what you need to work out. Google will return to you the value, in this case 1.50 is worth $2.38.

Note: These values will fluctuate! Currencies are moving all the time so you will need to recalculate via this method periodically to ensure you stay on course, i'd suggest recalculating your risk at least every 2 weeks. Risk calculations are only 100% accurate when they are for pairs in the same currency as your account balance.

b. Now apply the divide by 10 rule

$2.38 / 10 = 0.23 lots

Note: Normally when you are rounding numbers, you'd round 0.238 up to 0.24, not down to 0.23 as I have done. However, we are working with risk here, and if you round your figures up remember you are actually risking more than 2% now! For that reason i ALWAYS round my figures down.

Note: JPY pairs (GBPJPY, USDJPY, etc)

You cannot use the divide by 10 rule for JPY pairs. You must divide by 1000 instead in stage 4 or 5 above.

Donna, this is perfect. The #1 reason why most Forex traders fail is lack of a solid equity management plan. I see it all too often..trade gets lucky and takes his $800 account to $1000 on 5 or 6 trades. Then gets aggressive and trades 1 standard lot on a trade, with no stop, and ends up closing the trade in a panic with a $200 balance. Folks, this is 100% the real deal. If you do not have a game plan on how much you are going to risk BEFORE you take the trade, you are going to end up getting slaughtered.

Thanks Donna   :)

Offline FX.RA

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Re: Risk Calculation Practise and Information
« Reply #3 on: March 27, 2013, 08:50:25 PM »
This information is very true.

People don't realize sometimes how using this type of strategy (while it may be boring) will keep you coming out positive by years end. Even if you only make 1% a day on your balance you will be gaining more than you ever would keeping that money locked away in a bank vault somewhere collecting dust. :)

Are you restricted to which broker you can use because of your countries regulations? Consider obtaining the Offshore advantage. We offer the most competitive prices around.
www.fxibc.com

Offline Abdul kader

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Re: Risk Calculation Practise and Information
« Reply #4 on: August 17, 2013, 03:46:23 PM »
I also observe that It automatically compensates for 3/5-digit brokers, so if you want a 30 pip SL you should enter 30 and not 300 and leave the indicator to make the adjustment.  The other thing that it does is to adjust for your broker's minimum lot size and lot increment.  Let's suppose that the indicator calculates that your intended lot size for a risk of 3% is 0.02 lots, but your broker doesn't allow micro lots and his smallest lot size is 0.1 lot, then the indicator will tell you on screen what the actual risk is that you will be taking (in this example, 15%).

Finally, it also calculates lot sizes on the basis that the stoploss is at a fixed level, such as underneath a recent low or just outside a trendline.  As an example, let's suppose cable is at 1.6150 and you want a SL at 1.6100.  As the price moves up or down, the SL distance will constantly change more or less than the initial 50 pips.  The indicator will update itself with every price change to ensure that you take a smaller trade as the SL distance increases and a larger trade as the SL distance reduces.  It also draws a line on the screen at the SL level you choose so there can be no confusion that you may have entered the SL level incorrectly.

Offline mazad4

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  • Posts: 21
Re: Risk Calculation Practise and Information
« Reply #5 on: August 19, 2014, 05:20:23 PM »
As per my newsletter this week, this topic is for anyone who wants to test out their risk calculation skills (working out what lot size to trade to risk a set % of your account - eg, if i have a $10k account and want to risk 5% on EURUSD with a stoploss of 75, what size must i trade at?).

Post your calculations here and someone will be along to check them over for you. Don't be shy, and don't worry about messing it up, this topic is here to help. Feel free to ask questions -- and if you are a more experienced trader feel free to lend a hand here too helping others.
Note: Don't panic if you are seeing this before receiving my newsletter, i'm actually posting it a few hours beforehand, you are just quick off the mark ;)

-------------------------
-------------------------
Article on Risk Calculation Taken from my newsletter (with extra bit on the end which wouldn't fit in the newsletter!)


How do I calculate what size to trade at if I know I want to use 2% risk (I don't want to lose more than 2% on my next losing trade!)?               
This does involve a little maths i'm afraid!  I'll try to answer as simply as I can though.

1. You need to find out what 2% actually is.  To show you the calculation I'm going to use an example of a $2,000 account.  Here it is:-

($2,000 / 100) X 2 =  $40

In very simple terms, just take your account size, divide it by 100, and then multiply your answer by your risk size in percent. The answer here is $40, which is the most we want to lose on a bad trade.

2. Now write down your stoploss value in pips. Let's say for this our stoploss is 30 pips. If your strategy uses variable stoplosses, use the 'worst case scenario' stoploss (the highest value).

3. Divide your risk amount by the stoploss value to find out how many $ per pip you can trade:-

$40 / 30 =  $1.33 per pip

4. Now work out what that is as a lot size. This is very simple if you are trading a USD pair (eg EURUSD) and your account is in USD, you simply divide by 10 :-

$1.33 / 10 = 0.13 lots

You can also divide by 10 if your account is in the same currency as that which you are trading, eg a GBP account trading a GBP currency (it is the SECOND currency in the pair that has to match, eg for USD accounts you can divide by 10 on any of the USD pairs such as EURUSD, GBPUSD - and for GBP accounts you can divide by 10 if you are working with EURGBP for instance).

If the second currency in your pair is different to your account currency, this is a little harder, although you can usually use the above method to approximate if you wish, just remember that it won't be exact.

5. The longer way of working it out for currencies not the same as your account currency...

I need to change our example a little here to a different currency. We calculate up to point 3. above as normal. Let's say our calculation is in GBP and comes to a figure of 1.50 and I want to trade the EURUSD pair.

a. Convert 1.50 into the correct currency for the pair (USD in this case because it's EURUSD). To do this you need to find out the recent exchange rate. You can get this data off your chart, or to make life easier you can simple go to google.com and type into the search "1.50GBP in USD" - obviously replace the values with what you need to work out. Google will return to you the value, in this case 1.50 is worth $2.38.

Note: These values will fluctuate! Currencies are moving all the time so you will need to recalculate via this method periodically to ensure you stay on course, i'd suggest recalculating your risk at least every 2 weeks. Risk calculations are only 100% accurate when they are for pairs in the same currency as your account balance.

b. Now apply the divide by 10 rule

$2.38 / 10 = 0.23 lots

Note: Normally when you are rounding numbers, you'd round 0.238 up to 0.24, not down to 0.23 as I have done. However, we are working with risk here, and if you round your figures up remember you are actually risking more than 2% now! For that reason i ALWAYS round my figures down.

Note: JPY pairs (GBPJPY, USDJPY, etc)

You cannot use the divide by 10 rule for JPY pairs. You must divide by 1000 instead in stage 4 or 5 above.

This here is a beautifully written statement on risk management! It's posts like these that really help out some of the newbies just getting to Forex! Thank you for your insightful post Donna! Good luck trading everyone!

Offline Lila5

  • Jr. Member
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  • Posts: 25
Re: Risk Calculation Practise and Information
« Reply #6 on: October 02, 2014, 10:37:06 AM »
well explained, thank you!

Offline tau

  • Jr. Member
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  • Posts: 10
Re: Risk Calculation Practise and Information
« Reply #7 on: April 16, 2015, 08:51:45 AM »
hii  guys ...
the information given above is very true .
friends thanks for helping me this information is really helpful for me

thank you

Offline dftrader

  • Jr. Member
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  • Posts: 24
Re: Risk Calculation Practise and Information
« Reply #8 on: October 08, 2015, 06:23:31 PM »
Just read through #1 and it's really helpful.

Offline drunkfx

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  • Posts: 687
Re: Risk Calculation Practise and Information
« Reply #9 on: March 22, 2016, 08:37:34 PM »
Quote from: donnaforex link=msg=68487 date=1296415177

As per my newsletter this week, this topic is for anyone who wants to test out their risk calculation skills (working out what lot size to trade to risk a set % of your account - eg, if i have a $10k account and want to risk 5% on EURUSD with a stoploss of 75, what size must i trade at?).

Post your calculations here and someone will be along to check them over for you. Don't be shy, and don't worry about messing it up, this topic is here to help. Feel free to ask questions -- and if you are a more experienced trader feel free to lend a hand here too helping others.
Note: Don't panic if you are seeing this before receiving my newsletter, i'm actually posting it a few hours beforehand, you are just quick off the mark ;)

-------------------------
-------------------------
Article on Risk Calculation Taken from my newsletter (with extra bit on the end which wouldn't fit in the newsletter!)


How do I calculate what size to trade at if I know I want to use 2% risk (I don't want to lose more than 2% on my next losing trade!)?               
This does involve a little maths i'm afraid!  I'll try to answer as simply as I can though.

1. You need to find out what 2% actually is.  To show you the calculation I'm going to use an example of a $2,000 account.  Here it is:-

($2,000 / 100) X 2 =  $40

In very simple terms, just take your account size, divide it by 100, and then multiply your answer by your risk size in percent. The answer here is $40, which is the most we want to lose on a bad trade.

2. Now write down your stoploss value in pips. Let's say for this our stoploss is 30 pips. If your strategy uses variable stoplosses, use the 'worst case scenario' stoploss (the highest value).

3. Divide your risk amount by the stoploss value to find out how many $ per pip you can trade:-

$40 / 30 =  $1.33 per pip

4. Now work out what that is as a lot size. This is very simple if you are trading a USD pair (eg EURUSD) and your account is in USD, you simply divide by 10 :-

$1.33 / 10 = 0.13 lots

You can also divide by 10 if your account is in the same currency as that which you are trading, eg a GBP account trading a GBP currency (it is the SECOND currency in the pair that has to match, eg for USD accounts you can divide by 10 on any of the USD pairs such as EURUSD, GBPUSD - and for GBP accounts you can divide by 10 if you are working with EURGBP for instance).

If the second currency in your pair is different to your account currency, this is a little harder, although you can usually use the above method to approximate if you wish, just remember that it won't be exact.

5. The longer way of working it out for currencies not the same as your account currency...

I need to change our example a little here to a different currency. We calculate up to point 3. above as normal. Let's say our calculation is in GBP and comes to a figure of 1.50 and I want to trade the EURUSD pair.

a. Convert 1.50 into the correct currency for the pair (USD in this case because it's EURUSD). To do this you need to find out the recent exchange rate. You can get this data off your chart, or to make life easier you can simple go to google.com and type into the search "1.50GBP in USD" - obviously replace the values with what you need to work out. Google will return to you the value, in this case 1.50 is worth $2.38.

Note: These values will fluctuate! Currencies are moving all the time so you will need to recalculate via this method periodically to ensure you stay on course, i'd suggest recalculating your risk at least every 2 weeks. Risk calculations are only 100% accurate when they are for pairs in the same currency as your account balance.

b. Now apply the divide by 10 rule

$2.38 / 10 = 0.23 lots

Note: Normally when you are rounding numbers, you'd round 0.238 up to 0.24, not down to 0.23 as I have done. However, we are working with risk here, and if you round your figures up remember you are actually risking more than 2% now! For that reason i ALWAYS round my figures down.

Note: JPY pairs (GBPJPY, USDJPY, etc)

You cannot use the divide by 10 rule for JPY pairs. You must divide by 1000 instead in stage 4 or 5 above.




Good info for newbies trying demo account.. For advanced information I think I should look up for a book on theory of probabilities.. ;D Anyone knows good source for dummies??

 

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