Jump to content

Risk management - a must have in every trade.

Recommended Posts

When you trade you always need to know how much you would lose if the trade goes against your direction/way. That risk must be calculated and no more than 1% (meaning if you are playing with a total of 100$ in your demo account, in the event of a 'stoploss hit' it will only generate 1$ in losses).


After doing your own technical analysis you need to determine where to place stoploss on the chart and measure it in percentage size, yes we do need to know in percentage how big is the distance where we would let some wiggle room for the trade to be in a loss before closing out. It's part of our invalidation, if the trade goes beyond our invalidation point, the stoploss is there to protect our capital from wiping out our entire demo account in a single trade which is unacceptable.


The formula to calculate the risk starts from knowing our total demo account size, for example it's 7600$.
Next we need to find out how much is 1% of our current capital, in this case 7600$ * 0.01 = 76$.

After we know how much is acceptable to be lost, we take into consideration the stoploss distance size on the chart in percentage.
Let's say we have identified that our stoploss is exactly 4% in distance from our entry. 
To know how much demo money we can use to enter the trade we use the following formula now 76 / 0.04 = 1900$

As you can see, even though our whole demo account is 7600$, we will actually enter a trade with only 1900$ in value which will let us maintain that 1% risk ratio.


TL;DR to calculate position size based on proper risk management is:

7600$ * 0.01 / 0.04 = 1900$
Account size * risk percent / stoploss distance = trade entry size.


The only moment we can use "more leverage" or actually more than our account size is when our stoploss is less than 1% in distance while maintaining 1% risk percentile.
As example; 7600 * 0.01 / 0.005 = 15200$ In this case it's 0.005 because stoploss distance is 0.50% on the chart, which will allow us to use 2x leverage.

Formula for SL is 0.50 / 100 = 0.005 === the same with 4% >> 4 / 100 = 0.04

Happy trading on your demo accounts, making those paper money.

  • Like 1
Link to comment
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.


  • Create New...