RISK-MANAGEMENT SYSTEM: THE BANE OF THE RETAIL TRADER’S SUCCESS
As the name implies, its what break or make a Forex trader no matter their experience.
Without further ado, we gonna cut to the chase.
McCollum has $178.639 in his trading acct and wants to buy the €/₤ after his comprehensive analysis. As a shrewd trader, the ideal account type he selects is the micro account, where 1 pip equates to 10¢. The exchange rate of this pair at the moment he wants to buy is at 0.8635. He then decides to risk 0.85% of his account size according to his rule-book.
Firstly, he has to figure out what is 0.85% of $178.639?
Don’t worry, if you skipped Math classes when playing truancy while in middle school as I will lay it bear and so simple for you to comprehend.
0.85% of $178.639 = (0.85/100) X 178.639. This gives him $1.52.
Next, he has to ask the question: How will $1.52 translate into 0.85% using a micro account size? $1.52 equates to 152cents and this translates to 15.2pips on a 10cents/pip account (micro account). 152cents/10cents = 15.2pips. There ain’t nothing as a fractional pip, so you discard that.
Next, McCollum will set a stop loss of 15pips below the exchange price of 0.8635, which will be 0.8620
Next, he has to decide how much he wants to earn as per pips. This all depends on market condition and other factors like liquidity, volatility, trading session etc. This is done at his discretion.
Stacey’s got $3977.8662 in her trading account and wants to sell the AUD/CHF exchanging at 0.7151 after analyzing the situation about this pair. According to her rule-book, she will put up 1.377% of her account size as risk. Now, she gotta decide where she will place her stop loss which solely depends on the 1.377% risk.
First, she has to figure out what is 1.337% of $3997.8662?
(1.337/100) X 3997.8662 = $53.45
Next, she has to decide what account type she gon’ select, and how many pips she is willing to lose, if she got a bad trade.
After some thought about it, and according to the prevailing market condition, she decides to put up a risk of 6 pips, spread inclusive as she is trading with a broker with minimal spread.
An $8/pip volume size will do the trick as any one higher would amount to $54, which has exceeded her risk limit of 1.337% ($53.45) and this is within the mini account type we mentioned earlier.
Her Stop loss will be set at 0.7157 above the exchange price and her take profit will be set as she see fit.
The first rule of business is to protect your investment. This is the only way you will have to get to trade another day.