Risk Reward. Still don't get it!
Posted:
Sat Jan 22, 2011 2:16 amby Strut1eleven
Hi Folks. I'm still having trouble working out Risk/ Reward. I read somewhere on here that "Position Size= Risk/Stop Loss" I know what a Stop Loss is and I know what a position size, But what is the risk and how do I know what the risk is prior to entering a position size. I'm confused. Also, I have a demo account with FXCM and I don't know what the leverage is, so assuming that Risk is the leverage amount, how do I work this out? basically, could someone out there tell me how to work out what my position size should be relative to my desired Stop Loss. Thanks.
Re: Risk Reward. Still don't get it!
Posted:
Tue Jan 25, 2011 8:29 pmby SharpForex
Determine the percentage of your account funds that you are prepared to risk. Determine where you will place your stop, and calculate the dollar value between your proposed stop and the entry price. Now divide the percentage of capital you are prepared to risk by the dollar value between your proposed stop and entry price to determine number of lots. For example, assume you have $1,000 in account funds and you set a 2% ($20) risk factor (the amount you are prepared to lose if the trade moves against you). Assuming a Micro contract with a 10-cent pip value, if the value between your stop and the entry price is, say, 50 pips ($5.00), and you divide your $20 risk capital by this, the result will be 4 lots.
Why go to all this trouble? Because this method ensures that you do not exceed your risk factor whilst allowing you to maximise the advantage of a low risk trade. For example, if the stop value above were only 20 pips (low risk), you could trade 10 contracts whilst maintaining your 2% risk factor. Alternatively, if the stop value were 100 pips (high risk), you would only trade 2 contracts.
Trust this helps!