Jan 20 2013 at 23:33

I think you are missing the point of using risk % as your starting point. A 2% risk factor applied to a $10,000 account is $200. Divide $200 by the spread between your stop and the entry price to determine lots. Number of lots, and the margin required for each, determines the percentage of the account applied to each trade.

OK , Thanks Gary.

Is Mikey's analogy wrong ? I did not know there was a formula that is used. Or is this your own formula ?

Is Mikey's analogy wrong ? I did not know there was a formula that is used. Or is this your own formula ?

Jan 21 2013 at 00:49

This is a common formula, and is explained in the book 'Better Trading' by Daryl Guppy. Mike's analogy is not wrong at all. He is simply not prepared to trade more than 50% of the account balance at any one time, and is not prepared to lose more than 1% of account funds on any one losing trade.

In 'Better Trading' the author proposes no more than 6% of account funds should be committed at any one time, although he is talking about non-leveraged share trading. How relevant this rule is to leveraged trading remains undetermined, and the author acknowledges this.

I actually support Mike's 50% rule as it prevents over trading. But I like to include my win/lose ratio in my risk planning, as mentioned in my earlier post. Most importantly I want to know my longest losing streak to determine the percent of account funds that can be safely committed to a trade. Knowing your longest losing streak is key to money management, because it enables you to plan for survival using your actual trade performance.

Suppose your longest losing streak is 20 losing trades in a row. If you lost 5% per losing trade, then potentially 100% of the account is at risk. Lowering your risk factor to 0.5% reduces potential risk to 10% of account funds. Alternatively, if you can reduce the longest losing streak to 10 losing trades in a row, then a 5% risk factor reduces potential risk to 50% of account funds. If you lowered the risk factor to 1% then potential risk is reduced to 10% of account funds.

In 'Better Trading' the author proposes no more than 6% of account funds should be committed at any one time, although he is talking about non-leveraged share trading. How relevant this rule is to leveraged trading remains undetermined, and the author acknowledges this.

I actually support Mike's 50% rule as it prevents over trading. But I like to include my win/lose ratio in my risk planning, as mentioned in my earlier post. Most importantly I want to know my longest losing streak to determine the percent of account funds that can be safely committed to a trade. Knowing your longest losing streak is key to money management, because it enables you to plan for survival using your actual trade performance.

Suppose your longest losing streak is 20 losing trades in a row. If you lost 5% per losing trade, then potentially 100% of the account is at risk. Lowering your risk factor to 0.5% reduces potential risk to 10% of account funds. Alternatively, if you can reduce the longest losing streak to 10 losing trades in a row, then a 5% risk factor reduces potential risk to 50% of account funds. If you lowered the risk factor to 1% then potential risk is reduced to 10% of account funds.

myfxpt posted:

This is a common formula, and is explained in the book 'Better Trading' by Daryl Guppy. Mike's analogy is not wrong at all. He is simply not prepared to trade more than 50% of the account balance at any one time, and is not prepared to lose more than 1% of account funds on any one losing trade.

In 'Better Trading' the author proposes no more than 6% of account funds should be committed at any one time, although he is talking about non-leveraged share trading. How relevant this rule is to leveraged trading remains undetermined, and the author acknowledges this.

I actually support Mike's 50% rule as it prevents over trading. But I like to include my win/lose ratio in my risk planning, as mentioned in my earlier post. Most importantly I want to know my longest losing streak to determine the percent of account funds that can be safely committed to a trade. Knowing your longest losing streak is key to money management, because it enables you to plan for survival using your actual trade performance.

Suppose your longest losing streak is 20 losing trades in a row. If you lost 5% per losing trade, then potentially 100% of the account is at risk. Lowering your risk factor to 0.5% reduces potential risk to 10% of account funds. Alternatively, if you can reduce the longest losing streak to 10 losing trades in a row, then a 5% risk factor reduces potential risk to 50% of account funds. If you lowered the risk factor to 1% then potential risk is reduced to 10% of account funds.

Ah, OKay . Thanks very much. I will have to get that book and start using the tips from you and Mike .

Thanks Very Much

forexpipcatcher

Member Since Jan 10, 2013
286 posts
Jan 21 2013 at 09:15

myfxpt posted:

This is a common formula, and is explained in the book 'Better Trading' by Daryl Guppy. Mike's analogy is not wrong at all. He is simply not prepared to trade more than 50% of the account balance at any one time, and is not prepared to lose more than 1% of account funds on any one losing trade.

In 'Better Trading' the author proposes no more than 6% of account funds should be committed at any one time, although he is talking about non-leveraged share trading. How relevant this rule is to leveraged trading remains undetermined, and the author acknowledges this.

I actually support Mike's 50% rule as it prevents over trading. But I like to include my win/lose ratio in my risk planning, as mentioned in my earlier post. Most importantly I want to know my longest losing streak to determine the percent of account funds that can be safely committed to a trade. Knowing your longest losing streak is key to money management, because it enables you to plan for survival using your actual trade performance.

Suppose your longest losing streak is 20 losing trades in a row. If you lost 5% per losing trade, then potentially 100% of the account is at risk. Lowering your risk factor to 0.5% reduces potential risk to 10% of account funds. Alternatively, if you can reduce the longest losing streak to 10 losing trades in a row, then a 5% risk factor reduces potential risk to 50% of account funds. If you lowered the risk factor to 1% then potential risk is reduced to 10% of account funds.

WOW gary is Sharp :D but has too knowledge from everyone but himself lol

If you or anyone can predict your longest losing streak then you can prdict the lotto numbers for me, that will save me working my entire life right?

Jan 21 2013 at 09:57

I guess forexpipcatcher has never kept a trading log, nor checked the bottom of a MT4 trading statement. Of course, it takes a little longer than 9 days of demo trading to construct a usable trading log, and a little more time to understand the data presented on a MT4 statement, but if you keep studying you'll get there sooner or later.😎

forexpipcatcher

Member Since Jan 10, 2013
286 posts
Jan 21 2013 at 12:25

myfxpt posted:

I guess forexpipcatcher has never kept a trading log, nor checked the bottom of a MT4 trading statement. Of course, it takes a little longer than 9 days of demo trading to construct a usable trading log, and a little more time to understand the data presented on a MT4 statement, but if you keep studying you'll get there sooner or later.😎

A classic comment from an unsuccessful trader. That's why you're here and not out there trading and making a living out of it.

Your past results do not reflect your future results. As for data do show me what your mathematical abilty reflect not what your whinging reflect.

Jan 21 2013 at 18:58

forexpipcatcher posted:myfxpt posted:

I guess forexpipcatcher has never kept a trading log, nor checked the bottom of a MT4 trading statement. Of course, it takes a little longer than 9 days of demo trading to construct a usable trading log, and a little more time to understand the data presented on a MT4 statement, but if you keep studying you'll get there sooner or later.😎

A classic comment from an unsuccessful trader. That's why you're here and not out there trading and making a living out of it.

Your past results do not reflect your future results. As for data do show me what your mathematical abilty reflect not what your whinging reflect.

More waffle! Why can't you verify your track record? Why do your stats show 62% drawdown, but your DD chart shows nothing? I know why, and you do too!

You think I am critical of your EA, but I am not. It is the stats you are providing. You are trading 10,000 lots at 1:200 leverage, which is totally unrealistic. Please, name a broker that will allow you to trade these settings on a live account? If you want credibility, you have to be credible!

Jan 21 2013 at 20:21

rjm354 posted:

So according to your rules . if you have $10,000 you risk $1000 ( spread over several trades ) and then use $5000 to open positions . Leaving $4000 unused in your account.

Yes, but that's not how I look at it. It's still $5000, the risk is not loss yet. It is not unused, it is used to maintain margin required and prevents getting a margin call if the market goes against your positions temporarily.

This is how I set up the risk for any given strategy.

Suppose you have a system that trades 1000/year, probibility of losing trades = 0.5

You need to figure out how many consecutive losing trades your system is probably going to get. The formula is:

probable consecutive losing trades = ln( trades ) / -ln(probablity of losing trades)

Plugging in 1000 and 0.5, we get 10. The more you trade, the likelier this is going to occur. I like to double or even triple this number. Let's work on triple of this value, 30, to determine what risk whould we take for a single trade.

If the drawdown you want is 35%, divide this by the consecutive losing trades, 30, and we get 1.17% This should be the risk you take for each trade. You can use a higher dd% even 100% if your are adventurous.

My margin rule is not needed if you do not add to positions nor trade many pairs. If you do, you need something like my rule to prevent your system from using up all your balance for margin. Remember if you equity falls below required margin you get a margin call. Margin required depends on your account's leverage.

My strategy trades 28 pairs and also adds to existing positions. I don't want to commit all my balance to margin so I use this rule. Unfortunately, when it stops trading, I don't know whether the ones that I did not trade are going to be winners or losers. So I have some opportunity loss, but it's better than real loss.