We don’t care about the return on investment, but about the return of investment.
2% per Trade Maximum
We’re only going to leverage 2% maximum of our trade balance
If you have a 50k account you only risk 1k
If the trade goes against you and hits your stop loss you only lose 2% of your account
This won’t emotionally wear you out.
Overcoming the emotional game is one of the biggest problems in keeping yourself solid as a trader in the long term.
Stay out of the Revenge Trading mentality.
5% of total account at once when in multiple trades at once.
If you’re in three or more trades, only trade 1.5% maximum of your account balance per trade.
Never more than 5% collectively for all trades at once
If you’re already leveraging 5% of your account balance between five or six different trades and you see a killer trade come up don’t take it.
Stay out of the market and follow your Equity Management guideline
A Pip represents a unit of change in the quotation of a currency.
Pip Value allows us to translate Pips into Dollars.
It will help us understand what a certain number of pips means in terms of profit in our account
It allows us to calculate profit, loss and ultimately Forex Risk
When entering into a trade the market moves by a certain number of pips.
We also know that we have a specific volume of our transaction which is represented by the Lots variable
Together, the pips and lots variables combined determine Pip Value for a transaction
Pip Value is not just a function of the currency pair in question, but depends on the number of pips the currency pair has moved and also on the volume o f the transaction
If you enter the trade with a higher number of lots the pip value will increase
If you enter with a lower number of lots the pip value will decrease
Value = Lots x 100,000 x Price
The currency bought is calculated as the number of lots times 100,000 units of base currency times the price
The change in value is: Change = Value2 - Value1 (Quoted Currency)
Pip Value = Units of Quoted Currency/Units in Pips
Change = Lots x 10 x ∆Pips
Value Change = Value2 - Value1
Lots x 100,000 x Price2 - Lots x 100,000 x Price1
Lots x 100,000 x (Price2 - Price1)
Lots x 100,000 x 0.0001 x ∆Pips
Lots x 10 x ∆Pips (in units of quoted currency)
Pip Value = Change / ∆Pips
Pip Value = Lots x 10 x ∆Pips/∆Pips
Pip Value = Lots x 10
Pip Value = Lots x 10
If your currency moves a certain number of pips in a transaction and you have a volume equal to Lots, then the value of every single pip will be equal to the number of Lots in your transaction times ten, measured in units of the quoted currency.
If you’re trading EURUSD and you’re in the market with one lot, then every time the currency moves one pip in your favour then you’re earning ten units of quoted currency, i.e. USD.
If you’re in the market with a transaction that has a volume of ten lots then every time the currency moves in your favour you’re earning 100 USD.
Risk = SLPips x PipValue
The risk, i.e. the amount of money we can lose in one transaction, is equal to the Stop Loss measured in pips times the pip value
The amount of money that you can lose per pip
If you’re stop loss is 50 pips and the pip value is 10$/pip, then you can potentially lose $500 on this transaction if the stop loss is triggered
In Forex the above example means that the Risk = $500
Risk is also specified in units of the quoted currency
Risk is the maximum amount of money you can lose on a particular transaction
Risk = SLPips x Lots x 10
Combining Pip Value and Risk
Risk is the Stop Loss in pips times Lots times ten
Lots = Risk /(SLPips x 10)
This formula tells us, that if we know how much we can risk on a particular transaction,
i.e. we have a certain amount of confidence in the market
in our signals
in our decision to buy or sell
E.g. in a particular transaction we’re prepared to risk $50
We also know where we want to set our stop loss
We know that based on our signals our stop loss has to be at a certain level
From the information above we can derive the amount of lots that we have to enter the market with
We take the risk, i.e. the amount of money that we’re prepared to lose in this particular transaction if the market moves against us
We divide this by the number pips in our stop loss multiplied by ten
This gives us the amount of lots we should enter the market with
This is very powerful as it provides us with a way to control our risk
It’s wrong when a trader first thinks about the amount of lots they want to enter the market with
You should always first think about how much you’re prepared to lose if the market does go against you
This should be a function of your confidence in your trade, confidence in your signals, whether you’re trading with or against the trend, etc.
Then you have to know where you’re trading system is telling you to set your stop loss
This is the exact order in which these things are done
How much are you willing to lose if everything goes against you?
Where do you set your stop loss?
Risk is calculated in units of the quoted currency