Risk management is one of the key factors every Forex trader should consider carefully. In this episode of Truth About FX, Walter discusses an efficient way to set your lot sizes even if your account is not yet big enough to trade the weekly charts.
Download (Duration: 04:54/ 5.60 MB)
In This Episode:
- 00:49 – Finding the best broker.
- 01:32 – Why precise risk matters.
- 02:47 – Why you should use the same risk every time.
- 04:08 – The maths of risk.
Hugh: Hey, Walter. Today’s question is: I cannot afford to trade the weekly charts. What should I do?
And the underlying question is: my account is not big enough so I can’t afford big stop loss. What do you say to that?
Walter: I appreciate the question, Hugh. This is really a common one. I hear this one a lot as traders who trades daily in the weekly charts. I hear this a lot and my recommendation always is to find a broker, like Oanda, who will allow you to set your lot sizes.
It’s not just because it allows you to trade a thousand dollar account with a five hundred and fifty pips stop loss and still risk one percent of your account.
Not just that. That’s obviously the thing that you get by trading for two cents a pip or whatever it is. The other thing is that, over the long haul… I can post this video under the show notes for today’s session.
But, basically, what you want to remember is that — and it’s hard to see this — over the long haul, if you were risking precisely the amount at risk that you want, that might be; 1%, 2%, whatever it is for your system.
If you risk precisely that amount rather than having to choose — for example, if you have an account where you can’t set your lot sizes — you have to choose: am I gonna risk 2.5% on this trade or am I gonna risk 1.7%.
You know what I mean?
You can’t risk exactly two.
Hugh: Yeah.
Walter: Well, what happens over the long haul when you’re able to precisely risk 2% — and you’ll see this on the video — you actually will multiply your account by many, many, many percent over the years because you were able to take those 2% risk trades rather than the 1.7%.
If you think about it, it make sense because some of those trades that you’re risking 1.7% — because you can’t go over 2% and risk 2.5 so you have to choose the lower amount — some of those can be winners and those winners aren’t going to be as big as they would have been if you’re risking exactly 2%.
I highly recommend, even if you don’t trade the weekly chart, that you find a broker like Oanda who allows you to set your lot sizes precisely so that your risk is exactly the same on every trade no matter where your stop loss is.
Now, this is mostly important for those traders like myself who place their stops based on what the market has done. It’s not as key or critical for those traders who have a “I always use a 50-50 pips stop and I always go for a hundred target and so forth.”
Although I will say that the same principle applies as your account grows, you still want to keep that risk exactly at 2% or whatever your number is.
It’s just so much easier when your broker allows you to do that rather than having to choose: am I going to take 3 lots here or four lots here? You can’t do that 3.75 lots or whatever.
I’m just think it’s something that people overlook. It seems like it’s not a big deal but, if you’ll look at the math, you’ll see that it is a big deal over a lifetime of trading.
Let’s say, Hugh, you’re trading for another forty years from now and the amount of money that you’ll make just by allowing yourself to risk precisely the right amount is really astronomical when you calculate it out.
Assuming, of course, you’re making money and you have positive expectancy and all that but that’s what goes with that saying.
It’s really a big deal and I hope that most people here, consider that it’s worth it for you to go through the pain of changing brokers and finding a broker who’ll allow you to set your lot sizes.
It just makes mathematical sense.
Hugh: Yeah, I totally agree. Recently, I run a backtesting. I did one round where I did 2% and that made like 300% total.
I did another round where, like, it’s just a fixed amount. I didn’t even take the percentage risk into account and that made like 20% or something.
It can be pretty huge.
Walter: Wow. Yeah, that’s a great point.
People sometimes don’t even do this in their backtesting and so they go over that their system’s not good and they go over seven years and they only make 20% but obviously, it was good if you have your math right.
That’s a great point.
Hugh: Okay, Walter. Thanks for the insights.
Walter: Okay. See you next time, Hugh. Bye.
Tweetables From This Episode:
Find a broker who will allow you to set your lot sizes [Click To Tweet]
How to trade the weekly charts with a smaller account [Click To Tweet]
Choose a precise amount of risk in every trade that you make for your system. [Click To Tweet]
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