The very grim truth in this world is “NOBODY KNOWS WHERE THE PRICE WILL MOVE”, so no matter how good we think our system is there is always risk involved and loss is just inevitable. That’s why risk management should be an integral part to our trading system/strategy.
For some people risk management is already part of their trading, but some others may not be familiar with it, especially those relatively new to trading whose concerns mostly is finding a system with the best win:lose ratio, they tend to overlook the importance of it. I know because I was one of them.
So here I’ll share you a simple risk management strategy I’m currently using.
The very basic tenet in risk management strategy is “ASSUME THE TRADE IS LOSS”, it means whenever we decide to open a trade we must always assume that trade is loss already, it sounds crazy but psychologically that will relieve us of any pressure and make us ready for the worst. Personally I believe survival is the first and foremost thing in trading while profit is just a bonus, and risk management is all about managing our losses to survive long enough to win the fight.
The basic principle is simple, we just determine how many times our stop losses may get hit before we’re really out of the game.
For example let’s suppose that we have $1000 to start trading, the first thing we do is determine how many losses this $1000 will stand. Okay let’s say it’s 50 losses, that means we must limit a single loss to about $20 ($1000:50=$20).
Our next step is fit this $20 to our stop loss point by adjusting the lot size. Let’s say our system dictates that our stop loss is 50 pips and target is 75, now we must adjust the lot size to make 50 pips loss equals $20. First we must find out how much 1 pip is worth in $, if 50 pips = $20 that means 1 pip = $0.4 (do the math yourself, hehehe).
Next we need to determine the lot size to make 1 pip value equals $0.4. For 1 standard lot (100,000 units) 1 pip value is $10 (assuming the base currency is USD and we’re trading USD pairs), so to find out the lot size the math is (0.4:10)X1=0.04. There we go, now we know the volume we have to open is 0.04 lot.
Now by opening 0.04 lot if our stop loss is hit then we will lose 50 pips X $0.4 = $20, but if our target is hit we will gain 75 pips X $0.4 = $30. Sorry I’m not really good at math, so please do yourself some math your own.
Well I guess that’s all, mind you strategy is something very personal so take this as an example and develop your own. I hope you find it useful, cheers.
