How To Manage Risk Like a Pro...

Last updated 8/3/2011 1:06 PM EST (GMT -5) 47 Comments

FX360 Technical Analyst Staff

Technical Analyst, GFT

In terms of money/risk management, a general rule of thumb is to predetermine a max percentage of total account equity that one is willing to risk (1%-5% is typical, for example). The benefit of this discipline is two-fold. First, this prevents "heavy losses" occurring from any single trade since the size of each individual position would be adjusted to fit within this max % risk of total equity. (The term "heavy" is rather subjective since we all have different levels of risk tolerance which goes back to determining the max % risk of total equity per trade). Second, this type of discipline would also prevent heavy losses during a losing streak which, realistically speaking, is somewhat inevitable even for some of the most successful/experienced traders.  For example, risking a max of 3% per trade would mean that you would need to lose about 33 trades in a row to bring total equity to zero.

Once the amount of risk (in pips) has been determined for a particular setup (meaning the anticipated entry and stop-loss placement has been established) the position/lot size can then be calculated accordingly. For example, let's assume one of our trade recommendations carries 47 pips of risk with a pip value of $8.52 (based on standard 100k lot size). Let's assume, for the purposes of this hypothetical example, that a max of 2% of total equity will be put at risk on any single trade with a total of $10,000 in trading equity. This would mean no more than $200 may be put at risk on the next trade ($10,000 x 2%=$200). This also means that placing a single standard lot trade is out of the question because...[47 pips of risk] x [$8.52 pip value per standard lot] = [$400.44 total risk]…which is double the max % risk per trade! This is where "discipline" comes into play because a lack of this type of discipline tends to result in things spinning out of control typically leading to heavy losses....even if only by a seemingly small amount like 2%, which in trading reality is a HUGE difference. However, this same trade setup may still be acceptable by adjusting the position size to 5 mini lots because...[47 pips of risk] x [$0.85 pip value per 10k mini lot] x [5 mini lots] = [$199.75 total risk]…which is within the hypothetical 2% max.

The decision to enter then becomes a question of risk-to-reward ratio. In my experience risk/reward far outweighs winning percentage, and is the oftentimes the deciding factor in whether or not to take a trade. Don’t get me wrong, winning percentage is important to know, but in no way shape or form does it indicate how “successful” a strategy, or an individual trader for that matter, is performing.  I think the reason that so many traders get wrapped up in winning percentages is because winning a trade means you've made money, and losing a trade means you've lost money. So our focus tends to narrow to the last few trades as a way to measure success, and we start to lose sight of the big picture. Even worse, we may get wrapped up in each individual trade which tends to happen during both winning and losing streaks...either of which can be equally destructive (winning streaks oftentimes lead to overconfidence and deviation from strict risk/money management rules, whereas losing streaks oftentimes lead to desperation tactics with similar deviation).

What ends up happening is we get into the destructive (and perhaps humanly innate) habit of wanting to be “right” vs. being “successful.” For this reason, many traders tend to take profits quickly in order to be “right” or to get a “win” which also leads to a habit of hanging on to losing trades too long. This results in an unfavorable risk-to-reward ratio average, which may significantly diminish returns relative to winning percentage. In other words, it’s possible for someone to have a seemingly impressive 80% win ratio, but actually losing money over time. Conversely, a winning percentage of 30% may sound downright depressing, but may be extremely profitable. Consider the following…

There is only one way that I know of to truly measure trading success….sustained profitability. This is why having a risk/money management plan (and the discipline to follow it) is an absolutely essential part of any successful strategy (in addition to assessing one) without which, in my opinion, sustained profitability is virtually impossible.

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Comments (47)

mikeo

May 14, 2009 at 06:31 PM ET

Roger,

Thanks for that risk management refresher. It's always good to make sure I'm staying within my planned risk zone. I'm curious how you determine the "stop" portion of the risk equation in your recommended trades. For instance, the stop on your GBPUSD trade today seemed very tight considering the recent levels of volatility. I for one would welcome more of this type trading lesson.

mikeo

rstojsic

May 15, 2009 at 12:03 PM ET

This is a great question to be asking, unfortunately, there no simple explanation. For me stops, like entries, are determined based on fib/pattern convergence across multiple time frames so there's several things to consider...ABCD extension levels beyond entry are typically a good place to start looking for that convergence especially when pattern confirmation is found on smaller time frames because sometimes this helps cut down risk This results in significant improving the risk/reward when targets based on the larger time frame pattern. The GBPUSD trade you mentioned is a great example....the 5min pattern is the reason for the tight stop which got us out of a pretty strong continuation while providing a risk/reward of about 4 to T1 and almost 16 to T2. That means risking 3% would have yielded about 12% to T1, and about 48% to T2. Taking before and after shots of each trade helps in learning how to tweak both entries and exits, but the trick is to not place too much importance on each individual trade...no matter how great someone may be at placing stops there will always be times when you get stopped out by a few pips, and then the market goes straight to profit targets... i like to think of it as a psychological test of sorts which helps me to not beat myself up too much and/or overanalyze . Anyway, I also like going back every 10 trades or so to review blocks of trades looking at both completed trades, and setups that broke down.

LaDon

May 14, 2009 at 09:39 PM ET

I really appreciate this information. I follow u and Brad's recommendations. However, I over-leveraged myself in almost every trade, combined with taking profit too early. Long story short, last week, I traded a $52650.00 acct down to $2,245.00 in 7 failed trades. I found out the hard way that improper money management can kill ya. I appreciate this info. (Kinda wish I had it last week, lol) I guess I will use it with this $2,245.00 to trade it back up!!

mikeo

May 15, 2009 at 10:01 AM ET

LaDon, Did I read that correctly? Your down $50K on 7 trades?

areece

May 15, 2009 at 10:16 AM ET

Hopefully that was a typo and it was $5,265.00. ;-)

rstojsic

May 15, 2009 at 11:20 AM ET

Sorry to hear about the draw down, LaDon,. On the brightside, these types of "hits" seem to be a necessary evil...have you read "Market Wizards: Interviews with Top Traders" yet?

paisa954

April 22, 2010 at 05:41 PM ET

Amigo ... sorry to hear that. I think this is a great lesson for Roger to speak about, Sometimes people take trading like betting meaning is ether winning all or losing all and 95% of the times loosing is what happens. I encourage you to look further into capital management because i think this is the most important aspect...


MIKEO: I hope this is just bump in the road and you are able to learn from your mistakes.

Thanks Roger

Andrey Kondinskiy

July 15, 2010 at 03:55 PM ET

wow, sorry about your loss

jdgilk

May 15, 2009 at 03:17 PM ET

Amen brother...this is the most important lesson for all traders to learn and stick to it as though it would mean your death if you didn't. I don't know how many times I've seen a trade that looks like a sure thing and went outside my 2 percent risk limit and every time if I would have stayed with it over an extended period of time I would have come out ahead. It's a shame but, most of us have to learn it the hard way.. You won't be rich in a month or two, but give it a few years and you'd be surprised......You and Brad are the best at what you do and thanks for the help.

mglow

May 15, 2009 at 03:36 PM ET

Thanks for the article Roger, i've read that recommendation plenty of times but it never hurts to hear it again. I do have a question though....how often would you adjust trade size based on this criteria? To illustrate, if you have a $1000 account and risk 2% ($20 per trade) and had 10 losing trades in a row, would you still be using the same risk of $20 per trade?? Or would you adjust your trade size to reflect your new account balance and only risk $800*.02= $16 per trade? How often would you make this adjustment to your trade sizes (both up and down)??

Hope that question makes sense, thanks for your insight.

rstojsic

May 18, 2009 at 11:07 AM ET

I adjust for every single trade-both up and down. I created an excel spreadsheet which auto-calculates a running acct balance so it's then able to also calculate how many lots equal 3% of that running total. Hopefully we will have this or something like it as as an available tool for download in the not too distant future.

mglow

May 19, 2009 at 09:33 AM ET

Thanks for the insight.

Capri

August 20, 2009 at 07:05 PM ET

Hi, Roger, I also use an excel sheet that automatically updates the amount of pips I can risk on any given pair and also the dollar value. I do want to compliment you for your writing style. Many blogs, websites, and articles about trading are poorly written and can often be misunderstood. I appreciate the time you take to ensure that your trade reccommendations and articles are clearly structured, they make for a good read.

rck66

May 15, 2009 at 10:25 PM ET

Hi Roger. Your article is excellent and it touches on my biggest problem. I'm talking about focusing less on the winning percentage and more on the R/R ratio. Actually my problem is not as much as the R/R as getting out of my winning trade way too soon, even with a target already in place. Some traders friend of mine have told me that it is about trusting the strategy(ies) that I use, and I do but I get ansy when I see that profit and start fearing that I might turn a winner into a loser. I guess multiple contracts can be the final solution, which brings me to a question I had about the entry.
I have been thinking lately (and implementing) about scaling in in my entries. I'm going to use the example you use in your article.
Say the acct size is $10,000 and I'm going to risk 2% which is $200. Say that I see an opportunity to buy EURUSD @ 1.3000 with a stop @ 1.2950, that means that if I buy all 4 mini lots @ 1.3000 I cant do anything else with the trade. My strategy is this:
Buy 2 mini lots @ 1.3000, buy another lot at say 1.2980 and another 1 @ 1.2960 (the 2nd and 3rd entry can be at different places as I like to watch at what speed in this cases the pair is moving down and if it's crashing down there is no need to add to what most likely would be a losing trade).
But say that the market drifts lower and I get filled @ those prices, now my avg entry for those 4 lots is 1.2985 which leaves me the option of bringing my stop down to 1.2935 (still risking $200) or to leave it @ 1.2950 meaning that I would lose less than the 2% (I guess it depends if @ the stop level you feel is worth it staying on the trade or not).
There are 4 different scenarios that can happen: 1) You get stopped out on all 4 and lose no more than $200. 2) you get filled on the 2nd entry lowering your entry average and then it goes ur way, 3) You get filled on your 3rd entry then goes ur way and 4) You only get filled on the first two and the trade goes ur way with only 2 minis.
What do you think about this?

rstojsic

May 18, 2009 at 11:20 AM ET

well, I'm a big fan of keeping it simple. Scaling into a trade is one thing as long as it is within your entry and your predetermined stop (and only for a good, quantifiable reason) but adding to a losing position is never a good idea which would mean widening that initial stop. Above all, I think all entries/exits--whether scaling in/out or not---should be done in advance in order to avoid any need to monitor that trade. In my experience, I find the more i watch an open position, the more i screw it up. So, for me, i make it a rule to never actually place a trade when sitting at the computer.

sdg66

August 21, 2009 at 08:43 AM ET

"I find the more i watch an open position, the more i screw it up. "
Couldn't agree with you more.
'So, for me, i make it a rule to never actually place a trade when sitting at the computer."
This is a point I've considering for a long time. Monitoring means messing up things. After all, it's not in my power to exercise any form of control over the market.
I would recommend reading, and absorbing down to the deepest recesses of the heart, mind and soul, the masterpiece on trading psychology. It's Mark Douglas's "Trading in the Zone."

spunky

May 17, 2009 at 03:01 PM ET

I am just wondering about being on the right side of the net order flow . I mean that is what matters, correct ? All the indicators, technical, or fundamental are used so a trader can enter on the correct side . If you are getting hammered out of trades and stopped and stopped out , should'nt one review their reasons for taking the trade ?


How exactly can you predict future price action accurately to know a risk reward ratio in the first place ?

Money management and discipline are the keys , no ?


Thanks, I really like this article and site

regards
Brad

rstojsic

May 18, 2009 at 11:58 AM ET

Great questions, spunky, but what you asking is essentially compassing everything about trading so i wouldn't even know where to begin other than technical and/or fundamental analysis is used in identifying both entries and exits--never just entries--and should be the result of analyzing hundreds if not thousands of historic samples of a strategy based on specific parameters in order to identify and/or confirm the validity of entries and exits defined by that strategy.

spunky

May 18, 2009 at 12:06 PM ET

Thank you sir for replying I really enjoy your commentary;this is my second go around trading forex; wish I had this site the first time, it would of cut my learning curve alot regards Brad

Jai Thomson

August 21, 2009 at 07:34 AM ET

AUD\USD Stopped out. Just hit .83460...

HerrHimmler

August 23, 2009 at 05:46 AM ET

Fact:
[80% win ratio] x [3-to-1 avg. risk-to-reward ratio] = 20% return
[30% win ratio] x [1-to-3 avg. risk-to-reward ratio] = 20% return

But can you say that the risk-to-reward ratio isn't related to the win ratio ? If one finds a stratregy with a 1-3 rr ratio than it will most probably have a 30% win ratio because it is very hard to find a strategy with such rr that will have big wining percentages. And the same thing aplies to the other pair, big win percentage, small rr. It is easyer to find a strategy with big winning percentages, but it's big flaw will of course be the small rr ratio.
In my opinion one should look to find some sort of balance. A way of having both rr ratio and winning percentages high. Right now i am trading a 70% percent winning ratio strategy with a 1:1 rr ratio. Sure i could try to increase my rr ratio but then my winning ratio will go straight down. In order to improve my strategy i need to find a way to increase my rr, but in the same time keep the winning ratio constant. And i can assure everyone that this it's a very hard thing to do.
My point here is that winning ratio is as inmportant as the rr ratio and that the two of them are going togheter. I definatley don't think that risk/reward "far outweighs winning percentage". In my opinion, in order to really be succesfull one needs to carefully and equally watch both sides of the game, rr ratio as well as win ratio

NeoFX

January 14, 2010 at 04:35 PM ET

Roger, blogs like this truly make me realize how much more there's to learn here. You're truly a Forex Market pro.

I had a question (i'll try and keep it as inpersonal as I possibly can):

how did you, or how does one, become a professional trader in the true meaning of the word? how does one end up working for hedge fund companies, banks, or even world-wide broker such as GFT (my broker at the moment being btw) as yourself?

I know you can't really take this stuff in college or even major in anything like this? so where does one start --besides personal education and research----to become someone like, well, yourself :-)

can you comment on this please?
thanks
Redi

gabri558

January 16, 2010 at 11:56 AM ET

Hi Roger,

I have a question on Risk / Reward ratios.
I am a short term intraday trader n' it is often very difficult for me to achieve lower risk higher / reward ratios.

Let us consider a short term trader who is looking to make 20 pips on a trade. If he was to maintain 2:1 risk / reward ratio, his stop would need to be 10 pips. However 10 pips is just little bit more than the spread for many currency pairs which means that the risk of being stopped out is very high.
Alternatively if a trader knows that “support” is 50 pips away from the current price, then to maintain a 2:1 ratio, he would need to have a profit of 100 pips. Given that 100 pips is typically the average high to low range of a currency pair, it may be difficult to make 100 percent of an intraday move on a short term trade.

Could u kindly advice on this BIG headache of mine?
Appreciate that. Thanks!

alexjbrandt

January 16, 2010 at 07:29 PM ET

Here's my opinion, I'm a short term trader who has less then 15 pips for a take profit. Right now I have an account where my average win dollar amount is about $50, but my average loss is $150. Obiviously that is not a good risk/reward ratio. However, given that I win 95% of my trades, I've been easily able to achieve a monthly ROI of 15%+. I was able to take a client's $5k account to $20k in just 43 days, and I only had $3,000 in losses. I never try to capture 100% of a intraday move, cause it is virtually impossible to predict duration and length of a move. I only look for quick entry and exit points, using strict entry conditions. I personaly don't like pattern trades cause theres too many variables that have to be filled to place a trade. Not only are you speculating on the direction that price will go, but then speculating what price will do once that price level has been reached. And plus I don't have the patience to wait for a pending trade to get filled just to get stopped out. lol

FX4Sure

March 04, 2010 at 07:15 PM ET

hi Gabri, I would like to share my journal with you at Meetpips, mi nickname is IamXavi, I'm a swing trader and as you could see, my SL and TP are 50 and 100 pips respectively, sometimes risk reward varies by little pips but is because I want to fit with my entry/exit strategies.

Please feel free to add me or msg me

FX4Sure

March 04, 2010 at 07:23 PM ET

I don't want to spam or something like that by the way

StevieJ73

August 15, 2011 at 11:28 AM ET

Wow, that sounds pretty amazing Alex. Would you mind sharing what you trade and perhaps some of your trading strategy - that sounds so impressive - I'd love to trade like that!!
I'm working on an automated trading system, and if you're interested maybe we could help each other out.
Cheers, Steve

FXDragon

January 17, 2010 at 02:25 PM ET

Relying only on fib-pattern convergence for determining sl is more suitable for pairs that trade in a consistent channel. I'm trying a *monte carlo simulation with a pool of resistance and supports data that go back for years. For example usdyen price levels since 1980.
I'm experimenting trades right now with curencies but it works for stock indexes and commoditiies. Those expensive financial engineering classes in Columbia should be useful somewhere in the money.
*mc sim. is used widely trying to price options and swaps as well as in insurance industry. Some freak financiers thought they could apply it to CDSs considering a default free world.
Anyway im trying to find a better way to place sl.

FXDragon

March 04, 2010 at 03:25 PM ET

What the hell are you talkin 'bout. Go have a beer Dragon:)

Silenus

March 05, 2010 at 03:20 AM ET

Am I the only one who distinguishes between 'money management' (How many positions do I take? How big can they be?) and 'risk management' (Where do I put my stop?). Just asking.

MoneyManager

March 05, 2010 at 07:22 AM ET

I, for one, would find a semantic distinction to be of dubious value. You have to pay attention to all of those variables to succeed. Define them however you like, but stop placement is also part of money management, and controlling position size and number is part of risk management. And vice-versa. ^_^

Silenus

March 05, 2010 at 08:04 AM ET

Dear MM. Problem is the distinction isn't just semantic. Money management is an exact science ('Optimal f', 'Kelly', etc you smart guys know what I'm talking about) whereas Risk management is subjective - personally I'm with Dragon on this one. Only change my position when market conditions change. Why turn a temporary loss into a permanent one by using a stop?

MoneyManager

March 05, 2010 at 08:18 AM ET

As you wish Silenus. But stop placement can determine position size, and vice-versa. So to me slotting them under separate rubrics is kind of a semantic exercise, one that doesn't get me much ROI.

enslinFX

April 22, 2010 at 03:03 PM ET

My strategy is quite different. I've got 3 accounts (High, Medium and Low Risk). I don't trade with stop losses. For every £8,000 in my low risk account I trade £1 in pip value. Example: if I have £80,000 in my low risk account I can place a trade with a £10 pip value. Similarly on the medium risk account £2,000/£1 pip value and high risk account £500/£1 pip value. Essentially the market has to move 8,000 pips on the low, 2,000 on the medium and 500 on the high risk accounts to wipe out 100% of your equity. Personally I think if the market moves 8,000 pips against you, you deserve to be left with nothing.

I place small trades just like Alex, but try to capture 25 pips per account per day. Patience - this is key. Trust your judgement and your strategy - the decision to enter into a trade on the 8,000 risk account should be as prudent as the requirements to enter into a 500 risk account trade.

The advantage of this strategy is that you define the maximum amount available to lose in the high risk account. The returns are also exceptional and if your able to keep going for 4-6 months you'll be amazed at what an initial £1,500 account returns in hard cash on a monthly basis. If you lose - simply start over.

50% of the 8,000 account profit on a monthly basis gets dumped into the 2,000 account. In essence the low risk is funding the medium (2000) risk account and the 2000 the 500. This way you only lose profits and initial low risk equity is kept safe.

I don't know of anyone that utilises a similar strategy. Your comments are welcome.

EnslinFX

enslinFX

April 22, 2010 at 04:51 PM ET

I meant to say - .... you'll be amazed at what an initial £1,500 on the 500 risk account returns in hard cash on a monthly basis.

NeoFX

July 15, 2010 at 07:25 PM ET

with all due respect to the technical analists here, but I've kept an eye on this website for a little over a year now and unfortunately there's been more talk going on than making money...that's for sure.

If you look at the trade results on the "technical analysis" trade reccommendations tab, you'll see that this method of trading is simply not enough. They have lost way way way more pips than they've gained. honestly, I simply don't know how they make money like these.

I believe they ignore too many other indicators and formations (candle stick formations, breaks of trendlines with subsequent crown formations, too much momentum, etc)

I did learn, however, a lot from them as well. They're masters of the gartleys and butterflies when used in conjunction with Fib levels. But again, that is not enough in my opinion.

I think that one has to customize his own trading style to what feels best to him/her. some are more aggressive than others, and some are more patient than others. Moreover, some see things happening that others simply don't when they open the charts.

I've been making decent profits since last November ('09). And i've only been trading for about 2 years.

MY BIGGEST LESSONS ARE: DON'T BE GREEDY & LET TIME AND EXPERIENCE TAKE ITS TOLL BECAUSE IT TAKES TIME TO FIND A TRADING STRATEGY THAT ONE CAN BE CONFORTABLE WITH. Obviously, I dedicate a lot to trading as I'm always studying the charts and they, and no one else, have been my best teachers.

So give it time and don't be greedy. Seems easy but it's not trust me. Hang in there and have passion about reaching your financial goals and hopefully you won't hurt your wallet too much on the way there because trust me when I say this, LOSING IS PART OF THE GAME HERE!! YOU SIMPLY HAVE TO LOSE IN ORDER TO LEARN Just try and keep the losses small.

If you can do that You'll have conquered the elusive game called Forex..

good luck!

RD

FXDragon

July 16, 2010 at 04:00 AM ET

A commentor here i guess named GWTennis or something made a calculation. I think keeping track of posts since April, the posted trades made arround 3500 dollars. I guess risking around 1100 on a 1:3 risk-reward ratio. It seems good profit if you have well equity. I look forward to his long term tracks.

hsbc

July 16, 2010 at 11:24 AM ET

so u are recommending someone risk 1100 usd to make usd3500? crap, absolutely crap

GWA-Tennis

July 16, 2010 at 05:56 PM ET

The analysis I track for the fx360 trades uses a consistent $ amount risked on each trade of $500. So, on every trade we are putting $500 on the table and this is controlled through lot size. The 1:3 risk-reward ratio is very possible. In my trade plan I personally won't take a trade unless the set-up is 1:2 or greater. In my plan, I really focus on maintaining a solid risk-reward ratio, because it is so powerful in terms of your returns. If you look at the results page of FX360 right now, take a look at the NZD/JPY on 6/21 and the EUR/AUD on 6/25, both Bearish Gartleys. Here are the results of those two set-ups.

NZD/JPY, Entry - 64.98, Stop - 65.64, $/Pip = 1.09, Lot Size = $500/(66 Pips*1.09 $/Pip) = 7 mini lots
7 mini lots * 288 Pip win * 1.09 $/Pip = $2,182 reward
$2,182/$500 = 1:4.4 risk-reward ratio
So, in the above FX360 trade, we put $500 down and the market returned $2,182.

Using the same methodology above with the perameters of the EUR/AUD trade it was:
Risk - $500, market returned $1,350, which is a 1:2.7 risk-reward ratio.

Today, I took a 1:3.4 trade on the NZD/USD using horizontal support / resistance level, fib level and directional trend line break. Set-ups around these levels can have very good risk-reward trades.

If you look at my post under the NZD/JPY Bears Ready To Run, I have listed the FX360 results through July 7. You can find that post under the commentary section.

Hope that was helpful....

NeoFX

July 16, 2010 at 09:15 PM ET

GWA-Tennis,

your explanation not only is unfounded but it's also irrelevant.

First, you can't speak in terms of "putting down $500" to make so and so much....when talking forex we must always talk in terms of position volume, in other words, we must talk in terms of lots. With that said, how do you know what amount of lots the analysts at this website trade? no one knows that because no one's going to tell you how fat their trading account is.

It seems as if you're assuming that that's what they're risking based on the amount of lots you trade.

Second, you can't just pick two trades out of the blue that were decent winners. BEcause, again, that means nothing without propert risk management. YOu could make 1000 pips on one single month -long trade and make $1000 with a one lot position. But if you lost only 3 times during that month 20-35 pips with a 10-lot position trade then your huge winner counts for nothing.

No one knows what these guys are making. Above I was referring to pip amounts. And on a pip per pip basis, these guys have been losing way more than they've been gaining lately.If they doubled up on their winners they'd have a chance for profit but I doubt they do that given they're so desciplined in sticking to the plan and to the usual risk amount. Either way, all I'm saying is that there's more to this market than gartleys and butterflies.

GWA-Tennis

July 17, 2010 at 11:28 PM ET

NeoFX, below I will try to address your points.

I don’t see why I cannot talk in terms of $‘s at risk vs. position size. On each trade I plan to enter, if my stop loss is reached I want to know how much my loss is in term of $’s, as well as I keep it at a consistent dollar amount. The Forex world might talk in terms of position size, but I use $’s at risk to determine my position size. It takes a little math, but on every trade I calculate the appropriate position size (based on my stop loss PIP’s at risk) and determine the position size that equals $500, in the case of the FX360 tracking. This keeps each trade at the same weighting in terms of risk. If you use a consistent position size your dollars at risk on each trade will change unless you use the same stop loss pips and you use the same cross currency in your trades.

The reference to the two FX360 trades was just to point out that higher risk reward trades are possible and there are two examples, from a previous post. It was not meant to evaluate performance over time, but just examples of some recent successful trades with higher RR ratios.

The analysis of the FX360 results I have accumulated since April 1 uses this consistent dollar amount on each trade, which is $500 at risk per trade. This means the position size is different on each trade based on the set-up and pair. Even after the poor June and July, using the above methodology, as of today they remain profitable at +$2,995 and +279 pips. The $500 is an arbitrary number I used (perhaps a $50,000 account risking 1% on each trade), to generate a criteria to begin measuring the performance of the FX360 trades. If we used a consistent lot size vs. a consistent $ risked, I am sure the return would be different. Not sure if it would be positive or negative, but they would be different. It would be an interesting analysis to run.

In terms of the size of Brad or Rogers account or how large a position they take in their trades, that is none of my business and I am not concerned with it. The only account I am concerned with is my own. I can only assume they practice what they preach which is 1-3% of their account size at risk per trade and their dollars at risk remain constant with each trade. What I have interest in is does their methodology and trade recommendations produce profits over the long term? This is why I started tracking the results. Determine the position size of the trade how you want, but with a consistent dollar amount at risk on each trade as explained above, after almost 4 months, they are profitable. So, my conclusion at this point is their approach produces profits. You are correct that lately they have been in a tough period, but there are up times and down times in trading. I also agree with you there are other strategies outside geometric/harmonic patterns and probably some very successful traders using them. I also use another strategy as well in addition to the FX360 methodology. However, their approach is clear, it is about price reversal points using geometric pattern recognition. If you are looking for them to put their stamp on another approach, I don’t think you are going to find it on this site.

GWA-Tennis

July 19, 2010 at 08:50 PM ET

As I pointed out above, I went ahead and ran the FX360 trades with a consistent lot size vs. a consistent dollar amount at risk ($500 is used in the above results). 4 different lot sizes and below are the results:

1 Mini Lot = +$150
5 Mini Lots = +$751
10 Mini Lots (1 Standard Lot) = $1,502
20 Mini Lots (2 Standard Lots) = $3,004 and so on....

Either method, FX360 results are still profitable, at the moment....

TheMaxx

October 07, 2010 at 10:11 AM ET

You said "For example, risking a max of 3% per trade would mean that you would need to lose about 33 trades in a row to bring total equity to zero. "

I think you're slightly off. 3% risk per trade should be 3% of current equity, not 3% of starting equity. 33 losses in a row with 3% of current equity per trade will bring a $100K account down to $37K, not zero.

NeoFX

October 07, 2010 at 01:45 PM ET

Roger, you killed on the GBP/JPY. great short the other night.

also, this bullish gartley you also posted just triggered I think but it's still showing as "trades to watch".

and Brad's GBP/CAD also got taken out with a nice profit but it hasn't been updated either.

Thanks
neo

Big Weir

October 07, 2010 at 07:58 PM ET

Excellent write up, focusing on the risk/reward ratio is an important part of my trading, I have traded at a 40% success rate in a week and still come out 80pips up at the end of the week. Good risk management with good risk/reward ratios, with a good strategy a recipe for success

Big Weir

October 07, 2010 at 08:11 PM ET

Great article Roger,

A good risk/reward ratio is a must for a good trading strategy, I have traded as low as 40% success rate and still managed to be up at the end of a weeks trading due to good risk/reward ratios. It certainly helps with dealing emotionally with taking loss on a trade knowing that you can be wrong 60% of the time and still make money.

Obi

November 22, 2010 at 02:50 AM ET

Does not matter, Maxx. In the case of zero, you are done. Finished. The end. In the case of 100 to 37, you need 200 percent to breakeven. Both are losing situations. Important levels have been violated / ignored. Any trader in either case is finished.

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