Risk management – Holy Grail of Trading

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Traders usually focus on the profits, which is their biggest mistake. When you become the master of the risk, you will become successful.

We can never trade ahead of the market, which means that we can only control the risk. Of course, with experience, you will understand the market structure more and trade with more degree of certainty.

Believe me, risk management is by far most important thing in trading. I saw mediocre systems but with great risk management, that turned much better than great systems with poor risk management.

First step of risk calculation is determined by how much trading capital you have available. Risk per trade should always be a small percentage of your total capital.

0.5 – 1 % is conservative risk. 

2-4% is medium risk

5% is high risk

If you decide to trade with 3% risk, this means you can lose maximum of 3% of your entire account on a single loss.

So, for example, if you have $1000 in your account, and you choose 3% risk, the maximum loss would be $30 per trade. A 3% loss per trade would mean you can be wrong 33 times in a row before you wipe out your account. This is an unlikely scenario if you have a proper system for stacking the odds in your favor.

Systems without stop loss can’t use risk management and I’m highly against it, because sooner or later, you will burn your account with that approach.

How to calculate proper lot size?

We need to know 3 things:

Account ballance
Risk %
Stop loss size

Lets say you have 2000$ account (always calculate lot size by your current balance) and you calculated that your stop loss size is 35 pips. (Stop loss size is difference between starting price and stop loss price). You are trading with 2% risk. (don’t change risk % too often once you picked your risk).

Now that we have all required parameters, you input those in pip calculator in web (there are many links for that) or in position size indicator (feel free to ask me for it). I will share you what I mostly use: https://www.myfxbook.com/en/forex-calculators/position-size

For this example, our trade position size is 0.11 lots

Risk is inherent in every trade you take, but as long as you follow your own risk rules, you should get enough green pips.

Mislav Nikolic – Bull Capital

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