Risk Management Made Easy

There are easier ways: take a look at this example: at the time of this posting the account was on its way to around 200 trades. with a high accuracy level still. using no indicators when trading just a main system. and this is all manual trading.


https://www.myfxbook.com/members/blownaccount/forex-android-octave/1139818

You know Blown Forex, I would like to discuss your system with you, but there are a couple of obstacles. First, as a trader and professional risk manager, would you really expect others to just believe what you are saying without proof? Notice how I show my history and open trades? Without them, others would just have to have faith in me, not in the system. Without those two items, we really don't have anything to talk about, nothing tangible at any rate.

The second problem is your name. What kind of a name is Blown Forex Account Recovery Management? By the time I write it, I have forgotten what point I wanted to make. I have an online name that makes it possible for people interested in what I do, to be able to find out more about what we do. But then, I sign my real name at the bottom so the other traders can talk to me and I will know who they are talking to. It has worked pretty well for me.

So...
My name is Bob, and I am glade to meet you, tell me, what short and respectful name can we call you? And are you interested in comparing notes on our various systems?

Bob

Hello Bob, as far as proof, We Have posted live trade videos'ALL THE TIME' :) that go with the image posting. please take the time to take a look at them on https://www.youtube.com/user/forexalertsystem/videos?view_as=public

Your Right Transparency is very important. this is why i have made it easy for anyone to follow along or come up with there own trades using the same system i'm posting on. i like to share.


SECOND AND THIS IS A REAL IMPORTANT ONE! anyone reading this can just log in to the system themselves. Below is a login and password:

Go to this Link: forexalertsystem.com/Members/
User Name: FreeTrial
Password: Octave22

We have news coming out soon, i hope people find this system helpful. its using cutting edge Deep Learning...and anunsupervised learning Neural Net.

Simply put, risk management is a two-step process - determining what risks exist in an investment and then handling those risks in a way best-suited to your investment objectives. Risk management occurs everywhere in the financial world. It occurs when an investor buys low-risk government bonds over more risky corporate debt, when a fund manager hedges their currency exposure with currency derivatives and when a bank performs a credit check on an individual before issuing them a personal line of credit.

Simply put, risk management is a two-step process - determining what risks exist in an investment and then handling those risks in a way best-suited to your investment objectives. Risk management occurs everywhere in the financial world. It occurs when an investor buys low-risk government bonds over more risky corporate debt, when a fund manager hedges their currency exposure with currency derivatives and when a bank performs a credit check on an individual before issuing them a personal line of credit.

great advices brother 😄

risk management is important, thats way i am make a simple risk management application in excel.

This attactment is sample risk management of starting balance 2345, risk 2% each trade, leverage 50, stop out 0, and tp/sl 100 pips.

myfxpt posted:
    Never risk more than 2% equity on a single trade

    Cut your losses short and let your profits run

    Only trade positions with a 1:3 risk/reward ratio or better

Golden rules abound in this industry, and everyone seems to know the rules.

But who knows how to apply them?

How do you determine in advance if a trade will, in fact, deliver a 1:3 risk/reward ratio? At what point should you cut a loss short?

Unless you know how your strategy is performing, you can’t answer these questions. So may I suggest that instead of focusing on what you want your account to do, you should focus on what your account is doing?

Proper account analysis, performed on a trade-by-trade basis, has the power to reveal all. It will answer these questions:

    What is the win/lose ratio for your strategy?

    What is your risk/reward ratio?

    What is your Longest Losing Streak (LLS)?

    What is your Largest Losing Trade (LLT)?

The answers to these questions will put you in control.

I am assuming at this point that you have back-tested your strategy over at least the past 12-month period, and that you have historical account data for the back-test period. If not, guess what you’re doing next? Back-testing!

Calculations

Win/Lose Ratio: Number of Winning Trades / Total Number of Trades x 100 calculates your win (Win%) percentage. 100 – Win% calculates your lose (Lose%) percentage. Win% / Lose% calculates the number of winning trades per losing trade, the win/lose ratio. A 2:1 win/lose ratio means 2 winning trades for each losing trade.

Risk/Reward Ratio: Total Profit on Winning Trades / Total Loss on Losing Trades calculates your risk/reward ratio. A 1:3 risk/reward ratio means you earned $3.00 for each $1.00 lost.

Longest Losing Streak (LLS): Largest Number of Losing Trades in a row over the historical trading period. Total value of these losing trades tells you the dollar amount of risk your trading capital must be able to absorb to survive.

Largest Losing Trade (LLT): Largest Losing Trade over the historical trading period. Like your LLS, the value of the LLT tells you the dollar amount of risk your trading must be able to absorb to survive.

Application

I let my account performance tell me if I am doing it right, or doing it wrong. I use the results to tell me what to do next. It’s not complicated.

If I want to achieve a 1:3 risk/reward ratio, but I am getting only 1:2, then either my risk is too high, or my reward is too low. Either way, I need to review my strategy and amend it accordingly. If I am getting 1:3 or better I can do nothing, or I can consider lifting my risk a little to optimize future earnings performance.

If I want a 2:1 win/lose ratio, but I am getting only 1:1, then there is a problem with my entry/exit timing. I need to review my strategy and amend it accordingly. If I am getting 2:1 or better I can do nothing, or I can sharpen my entry/exit standards to optimize future earnings performance.

If I want to know how much capital I need to survive over a period of adverse trading conditions, I can use the combined value of the Longest Losing Streak (LLS) and the Largest Losing Trade (LLT) to give me a reasonably precise answer.

Case Study

In 2014, starting with $10,000 capital and trading 1 x Standard Lot ($100,000 USD), the MYFXPT Trading Strategy made 65 trades. Of these there were 42 winners (64%), 21 losers (32%), and 2 breakeven trades(4%). This gives the strategy a 2:1 win/lose ratio, so on average, for every 3 trades we win on 2 and lose on 1, which is a reasonable batting average. More enlightening, however, is the dollar value of winning and losing trades. (view results)

Losing trades totaled $11,996, an average $571 loss per losing trade, or a 5.71% risk factor. Our 42 winning trades produced a profit of $104,965, or an average $2,499 profit per winning trade. Hence, the strategy generated a risk/reward ratio of 1:4.87, which is above average.

We could conclude from these results that our strategy offers excellent potential, but these results tell us nothing about long-term survivability.

The number one objective of risk management is to survive a period of adverse trading conditions. For example, whilst a 1:4.87 risk/reward ratio and a 2:1 win/lose ratio look good in theory, would the account have survived if it had suffered those 21 losing trades in a row, starting with the very first trade? The answer is a resounding NO. We started with $10,000 and lost $11,996...we're gone!

Knowing the Longest Losing Streak (LLS) of your strategy is critical to survival planning. In our case the LLS is 3 losing trades in a row between 20th August and 8th September 2014. Those 3 losing trades generated a $2,252 total loss, or an average $750 per losing trade. Hence, in our case $10,000 start capital is more than adequate to absorb the LLS without blowing the account. Drawdown was 22.52% over the historical trading period.

This is important. If our objective is to limit account drawdown to 50% of account funds, and our LLS is $2,252, then we need $4,504 minimum start capital ($4,504 x 50% = $2,252). If we don't have $4,504 in start capital, but we are comfortable accepting 75% drawdown, we can reduce start capital to $3,002 ($3,002 x 75% = $2,252). At the other end of the scale, if we want to be extra safe and accept no more than 20% drawdown, we will need to increase start capital to $11,260 ($11,260 x 20% = $2,252). So knowing the LLS puts you in control of managing capital needed to survive adverse conditions ahead of time.

There is one final piece of information that is critical to survival, and that is the Largest Losing Trade (LLT) that occurred over the historical trading period. In our case we had a $2,310 LLT on 18th February 2014, and of course, we can employ the same drawdown analysis to ensure account survival, but the question remains: what would have happened if we experienced this LLT within the LLS, or worse still, what if we had 3 of these LLT's in a row? Suddenly we are faced with the potential for a combined losing streak of $6,930 in total, or 69.3% drawdown.

What is the statistical probability?

We completed 65 trades over the historical trading period, incurring an LLS of $2,252 and an LLT of $2,310, so there is currently a 1 in 65 chance of this occurring again. That is, over the next 65 trades there is the chance of an approximate $2,300 loss occurring either from an LLS or LLT. If these were to occur together, our risk is $4,562 over the next 65 trades.

If we combine the two, and use this as the basis of our analysis, the probable risk is that the account would need to withstand a potential loss of $4,562 over 65 trades.

If we want to limit drawdown to 50% we need $9,124 start capital ($9,124 x 50% = $4,562). If we accept 75% drawdown we need $6,082 start capital ($6,082 x 75% = $4,562), but if we want to limit drawdown to 20% we need $22,810 start capital ($22,810 x 20% = $4,562). What if you don't have $22,810 capital? You can always reduce your lot size from Standard Lots ($100,000 USD contract) to Mini Lots ($10,000 USD contract), in which case $2,281 capital would be required, or trade in Micro Lots ($1,000 USD contract) with $228 capital. See how all this account analysis stuff puts you in control?

All you have to remember is this:

Account analysis is dynamic, and the results will change with each closed trade. It is important, then, that you conduct regular account analysis to keep your trading performance data up to date. The risk factor, win/lose ratio, risk/reward ratio, LLS, and LLT, can all change with each completed trade, so it is in your best interests to update data accordingly.

As you can appreciate, this brief outline is far from being a complete study of risk management. My purpose here is only to highlight to you the work that needs to be done behind the scenes to ensure that funds are kept as safe as possible, whilst maximising potential returns. This is a risky business we are in, and we will only ever have statistical probabilities to work with. Attention to detail and routine account analysis will ensure that the odds are always stacked in your favour.

Do you have anything on leverage? Because it plays a major role too.

Leverage is simply a facility to multiply your capital earnings power. Whether it's 1:100 or 1:1000, risk is still controlled by your stop-loss, which in turn is determined by your risk factor. If the result of a trade were 100% guaranteed, you would use the maximum leverage available and fully employ that leverage, because you couldn't lose. But reality is different...we NEVER know the outcome of a trade in advance, so we never fully utilise leverage. For example, if you open an account with $1,000 and 1:100 leverage, you could trade a $100,000 contract, but it would only take a 1% loss to wipe-out your account. Hence, it makes better sense to trade a $10,000 contract or less, which means you are actually employing just 10% or less leverage. In this sense, leverage has little relevance to risk management. 😎

Hi Gary

Thank you for your post. You did a good job at explaining the risk management. I've a question in regard to LLS. Let's say a trading system LLS is 4 trades then suddenly it produces 7 trades (our monthly profit becomes negative). We stop trading for some time to analyse our losing trades to make sure that we still follow our trading plan. After analysing our trades, we are sure that we are still following our trading plan. So we resume our trading again. However this time it still produces more than 4 losing trades in a row and our monthly profit becomes negative. In this scenario, do you think that it's a sign that we should stop using the trading system because the market condition has changed? In summary, can we use LLS to determine whether it's time to stop using a trading system?

Thank you
Ronny

Phoenix137 posted:
Hi Gary

Thank you for your post. You did a good job at explaining the risk management. I've a question in regard to LLS. Let's say a trading system LLS is 4 trades then suddenly it produces 7 trades (our monthly profit becomes negative). We stop trading for some time to analyse our losing trades to make sure that we still follow our trading plan. After analysing our trades, we are sure that we are still following our trading plan. So we resume our trading again. However this time it still produces more than 4 losing trades in a row and our monthly profit becomes negative. In this scenario, do you think that it's a sign that we should stop using the trading system because the market condition has changed? In summary, can we use LLS to determine whether it's time to stop using a trading system?

Thank you
Ronny

Hi Ronny

Thanks for contacting me. I don't have a lot of information to work with in giving you some feedback, like the period over which the account has been trading and the total number of trades. But I think it is fair to say that if a system has consistently delivered an LLS of 4 trades, then becomes erratic and the LLS increases, then 'something' has changed and needs investigation. If you are confident that nothing has changed in the way you employ your trading strategy, then perhaps market conditions have changed. Look at the AUDUSD for example, a commodity based currency riding a commodity boom in recent years, but now under pressure as metal prices fall away. Take a look at how AUDUSD volatility has changed. In February 2013 ATR peaks were around 0.0079, February 2014 ATR peaks 0.0097, and now ATR peaks reach 0.0121...a 53% increase in volatility that's almost certain to impact stop-loss settings.

I am not certain that I would use LLS alone to determine if it's time to stop using a strategy, but at the very least, it would prompt me to halt trading whilst I investigate further. This is precisely what you have done, and in that sense, LLS has served the purpose for which it is intended...to alert you when things appear to be going wrong. Risk Management has done its job!

What has changed since you began trading the strategy?

Cheers
Gary

Hi Ronny

Thanks for contacting me. I don't have a lot of information to work with in giving you some feedback, like the period over which the account has been trading and the total number of trades. But I think it is fair to say that if a system has consistently delivered an LLS of 4 trades, then becomes erratic and the LLS increases, then 'something' has changed and needs investigation. If you are confident that nothing has changed in the way you employ your trading strategy, then perhaps market conditions have changed. Look at the AUDUSD for example, a commodity based currency riding a commodity boom in recent years, but now under pressure as metal prices fall away. Take a look at how AUDUSD volatility has changed. In February 2013 ATR peaks were around 0.0079, February 2014 ATR peaks 0.0097, and now ATR peaks reach 0.0121...a 53% increase in volatility that's almost certain to impact stop-loss settings.

I am not certain that I would use LLS alone to determine if it's time to stop using a strategy, but at the very least, it would prompt me to halt trading whilst I investigate further. This is precisely what you have done, and in that sense, LLS has served the purpose for which it is intended...to alert you when things appear to be going wrong. Risk Management has done its job!

What has changed since you began trading the strategy?

Cheers
Gary
Hi Gary

Nothing has changed with my trading strategy. Your explanation about risk management reminds me to when I first started my forex trading journey. I learnt, backtested, and forward tested a couple of the free trading systems on Forex Factory. When the trading strategy worked, the authors would feel very proud and kept focusing on the winners or just posted winning trades. However when the strategy stopped working then the thread just died. No further explanation. So I think that your LLS might give us traders a clue when to stop using a trading strategy or at least reduce our position size.
Thank you.
Ronny

If a trader really wants to achieve good results, he must understand the risks and be able to manage them.

True. Risk management can make trading more effective.

LyudmilLukanov posted:
True. Risk management can make trading more effective.

I agree with you. Risk management is very essential for every trader.

Try to control risk and maximize the result.