Volume Price Analysis – Chapter 12: Money management: position sizing, risk/reward and risk control

OK, you’re here. You have studied all the previous chapters (you did, right?!?) and you feel confident. That’s fine, but you’re still missing the KEY to the castle, the MOST important part of the pie that many traders like to overlook and many educators don’t talk much about… Money management

It may not seem too exciting on the surface, but once you understand its importance and how it can affect your emotions when you trade , you will realize that it is really the difference between being a successful/profitable trader and just another failed trader.

I want to make it very clear right now; YOU NEED TO READ THIS ENTIRE SECTION VERY DESERVED AND A LOT OF TIMES. If you skip this section or think you’ll “come back to it later,” everything else you’ve learned up to this point is essentially worthless. A trader cannot succeed if they do not focus on properly managing their risks and rewards.

Most traders focus too much on entry signals, indicators, ‘magic systems’ and a bunch of other ‘pleasant’ things, which is a complete waste of time, money and their life. NOT LIKE THEM. Be different. Listen to what I’m saying because I’ve been doing this for over 14 YEARS and I’ve helped thousands of traders just like you.

So I’ll see this right here and now… you’ve been warned… if you skip this part or don’t study it thoroughly, you may end up failing as a trader. Take the time to learn these things and put them in your brain. CRAZY !!!

Let me make something else clear before we dive into this section on capital management…

Risk and Profit are considered dollars at risk or dollars earned. It is not considered a percentage or number of pips, because the number of pips gained or lost tells only half the story. How many lots you trade will significantly affect how much your dollars are risked or earned, so no trader should measure profits in pips or percentages alone!!!

This is why traders have problems when trading with large stops, they are thinking in pips and not risking in $, a big mistake for novice traders.

The following information is dedicated to capital management and tells the truth about how a professional trader talks about capital risk/reward (profit) and trade management…

Let’s start with position sizing…

  • Why position sizing is more important than pips risk

Position sizing is a tool that is often overlooked or that many traders simply know nothing about. Position sizing is very important in forex trading and anyone actively trading in the forex market It is important to fully understand why this is important and how powerful it can be in helping you manage your emotions. It’s much more important to measure your risk on each trade you trade in dollars at risk versus pips risk. Many beginner and experienced traders mistakenly believe that a wider stop loss will require them to take on a larger dollar risk and a smaller stop loss will expose them to a small dollar loss. than. This is a false assumption and a big reason why you need to understand the role position sizing can play in your forex trading success.

  • The forex market offers the most flexibility in position sizing

If you are one of the many forex traders who have convinced themselves that position sizing and risk management are not important because your trading system or method is too accurate or because you feel like you are not. If you feel like your recent winning streak is never ending, you need to read this article more than anyone. The forex market offers great flexibility in position sizing; this is one of the biggest advantages that forex traders get compared to those who trade stocks or commodities. A standard lot of forex currency costs about $10 per pip, depending on the currency pair you are trading. Almost all forex brokers now offer mini lots as default position size, the minimum value for a mini lot is around $1 per pip and again this depends on the currency pair currency you are trading. Many forex brokers now even offer micro-lots, these effectively allow you to trade with position sizes as small as 1 cent per pip, however most brokers only reduce down 10 cents per pip. This extreme flexibility in sizing allows anyone to open a forex trading account with as little as $250 and still have a fighting chance to build it. Compared to commodity or stock futures,

  • A quick lesson in position sizing

The position size is basically the number of lots you are trading per trade, whether it is standard lot, mini lot or mini lot. For example, if you are trading 2 smaller lots of GBPUSD than this you have bought or sold US$20,000 worth of US dollars and depending on the exchange rate between the British Pound and the US dollar. move in your favor or not, you win or lose. amount equal to $2 per pip X number of pips transferred. So if you make 100 pips you will make $200. So that we can understand the math behind this, we’ll look at it from a different angle; if GBPUSD moves from 1.5600 to 1.5500 that would be a 100 pip move, effectively equal to 1 cent difference in GBPUSD’s exchange rate. So now we take .0100 x 20,000 and this equals $200.

To circumvent all this, 1 standard lot allows you to control about $100,000 worth and is worth about $10 per pip, 1 mini lot gives you control of about $10,000 and the equivalent at $1 per pip, 1 mini lot gives you control of about $1,000 and equates to about 0.10 cents per pip. Therefore, if you open a standard lot trading account and choose to trade mini lots, 1 mini lot will be .10 standard lots, 5 mini lots will be .50 standard lots, etc. If you open a trading account mini lots and choose to trade smaller lots 1 micro lot will be .10 mini lots and 5 micro lots will be .50 mini lots etc So in conclusion, the actual “size” of your position depends on whether you have a standard account or a mini account and how many lots you are trading,

  • Position sizing and risk-to-reward ratio

It is paramount to your consistent profitability in the forex market that you understand the importance of the risk-to-reward ratio and how it relates to position sizing. Before entering any trade, you need to know exactly how much you want to risk and the exact reward you think you can make in the trade. You should never take a profit less than you risked trading, you’ll see why this is so important in a minute. Once you have determined how much you want to risk than you adjust your position size to meet this amount. If you are trading mini lots and want to risk $50 trading with a 100 pip stop loss your position size will be 0.5 (remember 5 mini lots will be of 1 mini lot) ), 0.5 x 100 = $50.

The risk-to-reward ratio is very important to understand. If you risk $100 on a trade and your target is set at $200 i.e. you are doubling your risk if you win, this is the risk to share ratio. the reward is 1: 2. The important thing to realize here is that with a risk reward of 1:2, you can lose over 50% of your trades and still make money over time, in fact, you can You can LOSE 65% of your trades with a 1:2 risk reward and still make money. In a series of 10 trades if you win only 35% of them with a risk reward of 1:2, you will make $50 if you risk $100 on each trade.

This is where the power of the risk-to-reward ratio comes into play. Many traders mistakenly believe that they have to win a very high percentage of their trades to make money in the market. The reality is that the winning percentage has almost nothing to do with whether or not you make money in the long run. What matters is whether you are taking advantage of the risk-to-reward ratio. For example, if you maintain a profit of 3 times what you risk, the risk-to-reward ratio is 1:3. This effectively means you can lose 7 out of 10 trades and STILL make a profit. money. With $100 risk, you will lose $700 on 10 trades, but you will make $900 on your 3 winning trades because your risk reward is 1:3, so you win $200 even though you lost 70% of the time. You should start seeing how this works now, why it’s not appropriate to have a high winning percentage, and why it’s important for you to maintain a 1:2 bonus risk or higher for each trade you make. The reality is that it is very difficult to win more than 50% of your trades on any market, most professional traders only win about 50% of the time best in the long run, but they understand the power of the risk-to-reward ratio. they can still make very good money. most pro traders only win about 50% of the time best in the long run, but they understand the power of the risk-to-reward ratio. they can still make very good money. most pro traders only win about 50% of the time best in the long run, but they understand the power of the risk-to-reward ratio. they can still make very good money.

  • Risk is in dollars not pips

Position sizing allows you to adjust the number of lots you trade to meet the amount you want to risk per trade. This allows you to use wider stops while maintaining your desired dollar risk. Many forex traders mistakenly believe that a wider stop loss will mean greater risk. If your desired risk amount is $100 but you want to place a stop at 200 pips from your entry, then you can simply adjust your position size down to meet the amount. For example, assuming you are trading GBPUSD mini lots, risking $100 with a stop loss of 200 pips would require a position size of 0.5 (or 5 mini lots), you would trade ½ of 1 lot small would be 0.5 cents per pip, .50 x 200 = $100. So just because you increase your stop loss distance doesn’t mean you need to increase your risk. Many people will adjust their stops but not their position size; this is a big bug and the main cause of trading account blowing up. If you start risking $100 with a 100 pip stop but then decide to increase your stop another 100 pips, you’ve just increased your risk by $200 ($1 per pip x 200pips = $200 la). This is a major trading sin and you cannot afford to commit. You need to determine your risk in dollars BEFORE entering a trade and then adjust your position size accordingly to meet your desired stop loss distance to maintain the desired amount at risk . If you start risking $100 with a 100 pip stop but then decide to increase your stop another 100 pips, you just increased your risk to $200 ($1 per pip x 200pips = $200). This is a major trading sin and you cannot afford to commit. You need to determine your risk in dollars BEFORE entering a trade and then adjust your position size accordingly to meet your desired stop loss distance to maintain the desired amount at risk . If you start risking $100 with a 100 pip stop but then decide to increase your stop another 100 pips, you’ve just increased your risk by $200 ($1 per pip x 200pips = 200 dollars). This is a major trading sin and one that you cannot commit.

Likewise, many traders think that a smaller stop loss means a smaller dollar risk. However, this is not always the case, determining the position size will explain this. If Joe Trader has a stop loss of 50 pips but is trading $5 per pip (5 mini lots) his risk is $250 on the trade. If Susie Piper has a stop loss of 100 pips but is trading $2 per pip (2 mini-lots) her risk is only $200 on the trade. As we can see a smaller stop loss does not necessarily mean less risk, position sizing determines your dollar risk on the trade, not the number of pips. So from these examples the lesson learned for you is that risk should always be measured in dollars at risk,

  • Build your risk management plan around position size and risk-to-reward ratio

Traders often hear that they should have a risk management plan but often the idea of ​​it seems a bit abstract so they don’t give it more thought, or they just think, consciously or subconsciously knowledge, that they are so good at trading that they are not. ‘doesn’t need a well-defined risk management plan. The bottom line here is that you absolutely MUST have a well-thought-out and well-defined risk management plan if you really want a fighting chance to make money in the forex market. There is no way around this, you can get lucky for a while and make money without risk management, but any seasoned forex trader will tell you that luck will last only in the long run and that your habit of not managing risk will always come back to bite you,

Risk management does not need to be complicated to understand or difficult to implement. Most trading books or trading websites don’t really give any specifics about the risk management plan; they just briefly talk about their importance and then move on to talking about some bogus lagging indicator or other nonsense. Here’s what you need to include, in order, at a minimum in your forex risk management plan:

  • Determine your risk-to-reward ratio on the trade before joining.

Based on the setup you are using to enter, where is your stop loss and where is your profit target? If you can’t get the reward at least double the amount you risk than not making the trade. Payout risk below 1:2 is not sustainable over time as it is very difficult to maintain a high enough win ratio to maintain profitability with a risk-to-reward ratio below 1:2. Ideally, you should set a risk-to-reward target of 1:2, 1:3 or 1:4, as these are the odds with the highest probability of being hit before any significant retracement occurs.

  • Adjust your position size to maintain the desired amount of risk.

Once you’ve figured out your risk-to-reward ratio on a trade, you need to implement an appropriate position size to ensure you maintain your predefined dollar risk. The problem here is that not all settings are created equal; inherently has some discretion in any trading strategy. So depending on the quality of the setup, you can decide to risk more or less than usual. Regardless of the amount you decide on, you will need to ensure that you adjust your position size to meet your desired stop loss to maintain your dollar risk.

Realize that the amount of dollars at risk per trade is somewhat arbitrary. Forex trading is more of an art than a science; Conditions can be volatile or quiet, trending or consolidating, or any combination of the four. Any trading strategy will provide some degree of discretion, unless you are trading a “robot” system that never works in the long run. So your gain may be a little more or less risky depending on the quality of the existing setup. This is where device time and experience come into play. A general rule of thumb is to risk less than 3% per trade if you are a beginner trader who has not had much experience with the strategy being used. As you grow in experience and device time, you can risk more or less depending on whether you think the conditions are right or not. However, this is a very advanced method and traders without many years of experience will never risk more than 3% per trade. Just be aware that risking too much on any one trade will most likely affect stability your psychology and can cause you to lose control and make countless trading mistakes.

Manage your capital

Managing your trading capital is really about preserving it. You want to preserve your capital for clear/reasonable high probability price action setups, this way you will maximize your profit potential. Where most traders go wrong is that they abuse and overuse their trading capital. They quickly recoup their profits mainly because they don’t have the patience to stay out of the market and wait for another high quality price action signal to form.

You need to think of your trading capital as real money, not just numbers on a computer screen. You may want to withdraw some profit each month and hold some cold hard cash in your hand and realize that you can use it to pay bills or buy things… there is often a difference between the amount you see in online trading account and how much real money seems to you.

Money is very real and can be lost very,  very  quickly if you don’t choose your trades wisely. I have a great article on this topic of capital preservation, which I would like you to read now…

Personally, I don’t manage capital using the %risk model, I like to take a risk with a fixed amount. I have a lot of posts about this on my blog. Here are two articles on the subject (please read now) –

  • Minimize loss

The number one reason why most new currency traders don’t trade for a long time is because they don’t keep their losses small. When you lose on a trade, you have less capital to work with. Therefore, to make up for what you have lost, you must earn a significantly higher rate of return than what you have lost. Keep your position size small initially and apply a stop loss order.

We do not trade forex for gambling. It is paramount that you protect your trading balance. If you lose 25% of your account funds, you should stop live trading and return to demo trading until the trade is profitable.

  • Aim for consistency in risk, especially early in your career

Traders often make the mistake of increasing their dollar risk per trade after a few winning trades. Double or triple your risk too soon is a big mistake many traders make. Especially at the beginning of your trading career, you need to gain experience and learn your trading strategy until you master it, maintaining a consistent risk per trade, is the key. very important while at this stage and while building your account.

You can do something like set goals for yourself and when you reach them you can consider increasing your dollars. For example, you can say that you will double your dollars at risk for each trade after you have doubled the amount deposited into your original trading account. So if you start with a $2,000 account and risk say $100 per trade, you will wait until your account grows to $4,000, while risking $100 per trade and then you can increase your risk to maybe $150 or $200 per trade. You have to decide what’s best for you and what you’re most comfortable with. Just make sure you keep your per-trade risk constant until you hit certain milestones in your account. This will help control your emotions and will teach you patience and will also help you manage losses, all of which are very important for a beginner trader to learn. Once you’ve doubled your account or tripled it, you’re ready to handle the increase in risk per trade.

  • Stop Loss Protection

All good trading methods use stop loss orders.

A protective stop loss is an order to exit a buy or sell position if the price moves against you to a specific price. Stop loss insurance against an unusually large loss and must be used in one way or another.

Initial stop loss can be placed with your order on the trading platform. The trade will automatically close if the stop loss is hit. This type of stop loss will allow you to step away from your computer to watch TV, talk to people, or leave the building. It is the ideal stop and is used by most successful traders. You can still manually close the trade before the price reaches your target if the trade doesn’t seem to go your way. If you buy (buy), your stop loss will be below the market. If you sell (short), your stop should be placed on the market.

Mental Stop / Time Stop

This is the point you choose to exit if the trade does everything it can to do the opposite of what you expect. This doesn’t mean panicking or succumbing to emotions. The best example would be if you enter a trade and for the next 5 days the market moves up and down in a narrow range, invalidating the initial trade setup. It is possible that you use a mental stop loss and also use a regular stop loss as a backup in case things don’t go your way. Naturally, the broker cannot hit the mental stop because he cannot see it.

Trailing Stop Loss

Unnecessary stops. This involves the trader moving the stop loss when the trade is in his favor, e.g. In a long-term trade, EURUSD rises steadily from entry 1.2300 to touch 1.2500, trader Translator will monitor its stop loss down to 1.2300 to close the break even, allowing open profits to run. These are very high end orders, which will be discussed later.

Emergency stop loss

If you are trading very short, no stop loss, (not recommended).

This “Emergency Stop Loss” is a standard stop loss order placed 100 pips below or above your entry price to protect your capital in the event you have a computer crash, internet service outage, news event. sudden sudden spikes etc. Let’s hope you never trade this way.

Profit and loss ratio

If you’ve read part 1 of the course, you know we’ve covered the risk/reward basics there pretty well. But, I just wanted to go into the ‘theoretical’ side of it a bit more in this section. Let’s start with a quick refresh…

  • A positive risk/reward ratio of 1:3 means we will risk assuming 50 pips to make 150 pips. This is better than the negative reward ratio of 2:1, where we can risk 50 pips to make 25 pips.
  • Winning percentages are irrelevant as we incorporate a solid risk-reward scenario in our trading. If our profit is greater than our loss, over time our account will grow.

An important sentence above is “Winning percentage is irrelevant when we incorporate a solid risk/reward scenario in our trading”. Maybe it’s an exaggerated BIT, because you need to win SOME of your trades, so it’s not ‘irrelevant’, but what I mean is it doesn’t matter much, certainly not much as people think.

Consider that if you have a 1:3 risk:reward ratio on all your trades and you win only 6 trades out of 20, you will still make…

Let’s say you risk $100 per trade…

If you have 6 winners with 3x your risk (1:3 R:R) you will make $1800 in profit.

If you then lose another 14 trades out of a total of 20, you will only lose $1400.00, because your risk is 1R.

So you made $400.00 profit and you lost 60% of your trade! You’ve got a winning percentage at 30%.

That is shown on mini lots… if you trade standard lots / risk $1,000 per trade you will make $4,000, not bad if it takes 60% of the time!

Now, you should be able to understand the power of risk/reward. If you just focus on making high probability trade setups, you should be able to make money over time if you are aiming for a risk/reward around 1:2 or more. A skilled and experienced price action trader with a lot of patience just waiting for the most obvious setups (trading like a sniper), will easily win at least 50% of his trades. yourself… when you combine that with a risk reward of 1:2 or more per trade, you can easily see how the profits start to increase.

However, the key here is patience… there may be only a few good setups per month leading to big moves… but that’s all you really need. Even if your account is small, just worry about trading WELL and don’t worry about doing many trades per month. If you build a mini account over a period of 6 months to 1 year, it is a real asset and a demonstration of skill that any serious investor would stand to note and potentially funding for you.

Just remember that being a skilled and profitable trader is the goal… not making “a lot of money” right away. Money will attract you over time as you show patience and consistent discipline.

I’ve written a number of good articles on the topics of risk/reward and capital management already, I linked you to some of the articles above and grouped the rest together at the end of this section. read them all.


The three “Ms” of trading are Mind, Capital Management and Method.

If you don’t master one of the M’s, the other two won’t be so important. They are all interconnected and all depend on each other. If you turn off capital management, it will negatively impact your trading mindset, thereby causing you to deviate from your strategy and over-trade.

If your mindset is off track (more on that later), you won’t have the focus or discipline to properly manage your capital and control risk, which will lead to you risking too much and losing money. huge losses and eventually blow out of your account.

If you haven’t mastered the price action strategy I taught you here and learned to wait patiently for the most logical/clear setups like the examples discussed in the course, there should be no problem. if you manage your mind and money properly. , because you will waste them on low-probability transactions.

So the point is, DON’T UNDERSTAND the power and necessity of proper capital management and risk control. I say this because MANY traders are too focused on their strategy and pay little attention to risk management and trading capital, and that inevitably leads to their eventual failure.

It may sound ‘boring’ to you at first, sometimes it’s not what you ‘feel’ like doing… but if you want to be a consistently profitable trader, you absolutely have to be conservative. your trading capital and thoroughly understand the power of position sizing and risk/reward as discussed above.

Register Account Trading

Trả lời