Technical Analysis Power Course 3.15.2011: Risk Management II « FXTimes – Forex News, Commentaries, Technical Analysis, Education, Live Events, and more!

Technical Analysis Power Course 3.15.2011: Risk Management II

Fan Yang \ 2:15 AM EDT \ March 8th, 2011

Prev: Basic Risk Management
Recording Posted on Youtube:

Adobe Connect Pro Recording:
Technical Analysis Power Course 3.15.2011: Risk Management II (Recorded)
Click the link above for the recorded session in streaming video format (Flash required)

Fan Yang CMT, Chief Technical Strategist here at FXTimes will be the instructor. We will continue discussing trade trade management with some live examples. We will also discuss position sizing based on %equity to be risked, and where we place our protective stop.

Notes form the Power Point

Profile of a Trader’s Performance:

1.% Profitable: In a statistically valid number of trades, how many were profitable

2.Average Reward to Risk: The average gains on profitable trades vs. the average loss in losing trades.

3.Other parameters:

•Maximum Consecutive losing trades

•Maximum Drawdown: The sum of losses in the worst performing period in equity curve.

•Risk of Ruin: Risk of losing all capital

Know Thyself

•Project your trading method parameters from testing your system

•Risk Appetite – What are you prepared to lose in “worst-case scenario” – Maximum Operational Drawdown – ie. 50%, 30% equity?

Determine Exposure Per Trade

2 x maximum drawdown = Maximum Operational Drawdown

Example:

•Equity: $20,000

•Willing to Lose: $10,000

•Max Consecutive Losers: 10 (X2)

•10,000/20 = 500

•Exposure Per Trade: $500

•Fixed Fraction Exposure: 500/20,000 = 2.5%

Conservative Count

•When looking at exposure per trade, you may look at equity or balance – always look at the lesser one

•When in profit, look at the balance, as current profits may not reflect what your capital is.

•When in loss, look at the equity as balance does not count the loss until position is settled.

Determine Lot Size

Amount per trade=Lot Size/ (Pip size for stop x pip price)

$500 (2.5% of equity) / (50 pip stop X $10/pip) = 1 lot$500 (2.5% equity) / (100 pip stop X $10/pip) = 0.5 lot

Statistically Speaking

There are 2 adjustments traders sometimes apply to their trade sizes*

1.Increase exposure following losers

2.Increase exposure following winners

3.Fixed Fraction Exposure – exposure only varies with trading capital

Trend following parameter (more losers, but winners are bigger, with each loser chance of winner is higher) – use 1
Range trading parameter (more winners may follow as market remains in consolidation (2/3 of market action is ranging) – use 2
Use 3 if 1 and 2 do not have merit.

Exit-Re-entry; Position sizing within Trade

If pullback is expected, we can enter on breakout, and exit and re-enter with Parabolic SAR
Another technique adds on position only after continuation confirmation

Previous Lesson: Basic Risk Management (3.1.2011)

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Information and opinions contained in this report are for educational purposes only and do not constitute an investment advice. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. FXTimes will not accept liability for any loss of profit or damage which may arise directly, indirectly or consequently from use of or reliance on the trading set-ups or any accompanying chart analysis.

Comments

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keginv

Rating 0
Commented: March 5th, 2011

THANKS, BUT WHERE ARE THE WEEKEND NUMBERS FOR GOLD AND SILVER?

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Fan Yang

Rating 0
Commented: March 6th, 2011

Silver: http://www.fxtimes.com/technical-updates/silver-signaling-bullish-resumption-to-35-70-36-37-30/

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Fan Yang

Rating 0
Commented: March 6th, 2011

gold: http://www.fxtimes.com/technical-updates/gold-shows-positive-reversal-signal-targets-1458-if-1420-holds/

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Betty

Rating 0
Commented: January 11th, 2012

It's a pelausre to find such rationality in an answer. Welcome to the debate.

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