Risk and Money management
Last updated
Last updated
Risk and money management ensures that the risk as well as allocated resources are controlled in each opened trade.
Risk and money management deals with the following questions:
At which price level should I place an entry?
What is the acceptable level of risk for the trade?
How do I secure my position with a stop price in the best possible way?
Which currency should the be instrument traded in?
Which currency is my account held in?
What is the currency for the risk calculation?
What is the current price of currency pairs for the instrument/risk calculation?
What spread does the instrument have?
What average slippage does the instrument have?
Taking all of these factors into consideration, how large should the order size be?
Is the calculated order size even or odd (odd lots can lead to disadvantageous price setting by the market maker and bad execution)?
The most important part of risk management is understanding when is the optimal time to place an entry order and exit a trade, as well as how much risk can be accepted.
The difference between entry and initial stop shows the amount of money which may be lost during the trade.
The order size amount is calculated according to the following steps:
First of all, it is important to find a suitable entry point for submitting an order.
An entry signal can occur:
due to fully-automated setup
based on a signal in a semi-automated environment
discretionarily.
The generated signal should not necessarily be identified with an immediate entry order. This order can be moved away from the suggested price level. For example, you can program an order to only be submitted after an outbreak through the high or low of the current candlestick or an outbreak from the Pivot pattern, etc.
Once the entry order is set, the next step is to determine where to exit the trade if the price moves in an undesired direction. Be careful with fixed stops (e.g. 15 ticks after the entry). This kind of stop can lead to a situation in which you awkwardly exit the market from different positions without the possibility of removing the stops or adjusting the risk. Stops should comply with the relevant market-related points.
Calculates the number of cents/points/ticks/pips that will be at risk during the trade.
It is important to know which currency the risk for a traded instrument is calculated in. Usually the currency for risk calculations corresponds to the account currency. However, it is also possible to have accounts with different currencies. In order to have a clear overview of the risk you should define one currency to be used for risk calculation.
Select the Tools main menu followed by the Global Configuration menu item. This allows you to set the currency for risk measurement within the General -> Global Configuration: General. After confirming the settings, the values of all traded instruments will be converted into the chosen currency for risk calculation.
The account size is an important factor for calculating the order size. You should always adjust the risk to the account size in order to prevent a series of concurrent failed trades from exhausting your account. Of course, you can increase the risk if you have stable ongoing profits, but it is much more important to reduce the risk if the account size has decreased.
The following options for calculating the order size are available:
With this method, the order size is calculated as a percentage of the account Buying Power or Cash Value.
Assume that you have 25.000.- EUR cash value on your account and the broker provides you with a margin/leverage of 4. This makes 100 000.- EUR for you to invest.
Risk per trade is 0.15%. So, during the trade you will risk 150 EUR (the P&L currency). The absolute value will change proportionally depending on whether the account size increases or decreases.
If you select an entry price for a USD currency-based instrument at 11.93 and stop price at 11.75 then you have a difference of 18 cents. Add 1 cent for the spread and 2 cents for the slippage, and your total difference will amount to 21 cents.
This difference will be converted to your base currency. Assuming that the EURUSD exchange rate is currently 1.423, then 21 cents/1.423 will result in 14.7575€ cents at risk (or 0.147575€).
Now the evenly numbered order size will be determined by dividing 150 by 0.147575, resulting in 1016 purchased shares.
Applying this method of calculation, your risk will always remain the same but the corresponding amount will vary. Also note, that the resulting number of 1016 shares might be rounded up according to your rounding settings which are explained later in this article.
Assume that you have 100.000.- EUR cash value on your account. When not using the bying power option no margin/leverage is applied and this leaves 100 000.- EUR for you to invest.
Risk per trade is 0.15%. So, during the trade you will risk 150 EUR (the P&L currency). The absolute value will change proportionally depending on whether the account size increases or decreases.
If you select an entry price for a USD currency-based instrument at 11.93 and stop price at 11.75 then you have a difference of 18 cents. Add 1 cent for the spread and 2 cents for the slippage, and your total difference will amount to 21 cents.
This difference will be converted to your base currency. Assuming that the EURUSD exchange rate is currently 1.423, then 21 cents/1.423 will result in 14.7575€ cents at risk (or 0.147575€).
Now the evenly numbered order size will be determined by dividing 150 by 0.147575, resulting in 1016 purchased shares.
Applying this method of calculation, your risk will always remain the same but the corresponding amount will vary. Also note, that the resulting number of 1016 shares might be rounded up according to your rounding settings which are explained later in this article.
This enables you to set a fixed risk per trade regardless of the account size.
Assume that you set your risk per trade fixed value to 300 EUR.
If you select an entry price for a USD currency-based instrument at 11.93 and stop price at 11.75 then you have a difference of 18 cents. Add 1 cent for the spread and 2 cents for the slippage, and your total difference will amount to 21 cents.
This difference will be converted to your base currency. Assuming that the EURUSD exchange rate is currently 1.423, then 21 cents/1.423 will result in 14.7575€ cents at risk (or 0.147575€).
Now the evenly numbered order size will be determined by dividing 300 by 0.147575, resulting in 2032 purchased shares.//
With this option the amount of risk will have always the same size. Also note, that the resulting number of 2032 shares might be rounded up according to your rounding settings which are explained later in this article.
WARNING! The risk may vary in this case, meaning that losses are not really controllable. Since the risk remains constant, the changes in the account size will not be taken into consideration.
3.Max. Investment per trade defined by percentage You can define a maximum percentage calculated on either the buying power or cash value of your account to determine the maximal investment per trade.
Assume that your account cash value is 25.000 USD and you select calculated on cash value.
Also assume that you chose 15% to be invested per trade.
This means that a maximum of 3.750 USD is invested in one trade.
Pleae note that both the risk per trade and maximal investment per trade settings are considered in the order size calculations. When one of the paramters is reached the final order size is calculated. This could lead to either less investment per trade or less risk per trade. Also note, that small differences due to the rounding settings are possible. Rounding settings are explained later in this article.
A trader may have on a trading account many opened positions at the same time, possibly generating both profits and losses. It is important that an overview and control of all positions is not get lost.
The function Daily Loss Limit allows setting of the maximal amount of loss on a trading account per day. The total sum of losses is reported in the Column Daily PL of the Account tab. As soon as a total loss exceeds the set limit the following popup will be shown:
This popup offers two possibilities to a user:
The loss limit may be increased. To do this enter a new amount in the field New Daily Loss Limit, which should be higher than the previous limit. After pressing OK all positions on the current trading account will stay opened and trading will continue until the next loss limit is reached.
If you press the button Flatten and block then all positions on the account will be automatically closed and no trades will be allowed anymore.
The position size calculations mentioned in step 5 calculate odd-numbered position sizes. But in some cases the exchanges will use metrics such as lots.
For stocks, packets of 100 shares are usually implied
For Forex, these are 100 000 currency units
For the retail traders, sizes such as mini lots and micro lots (10 000 and 1 000 respectively) are also available.
Using the Global Configuration -> AT (Plus Plus): Order Rounding and also Futures tabs you can set the necessary parameters.
The following image shows one of the setups for calculation of the position size:
smaller than 300 will be rounded to the next 20;
bigger than 300 will be rounded to the next 100.
This example implies that the odd-numbered position sizes will be recalculated in the following way:
Risk per trade: 1016 -> 1000
Fixed amount: 2032 -> 2000
Another example: a position with 283 shares will be rounded to 280. The decision if the order size is rounded up or down as based on regular mathematics. Values from 1-4 will be rounded down and values from 5 are rounded up.
Important! Sim account can have a minus value which means that trading with sim account exceeded account cash value.
Important! Please find details on page AT (Plus Plus): Risk Management
