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# What Does " Risk" Mean Here ?

Discussion in 'Trading' started by joesan, May 17, 2005.

1. ### joesan

I have a simple question here.

Recently I found one definition of Fixed fractional money management as follows: risking no more than a fixed percentage of your total equity on any one trade.

I am not a native English speaker, so I found the meaning of "risk" a bit confusing to me . what does risk mean here ? Say if you have a \$100,000 account, and the fixed fraction you apply is 2Â£Â¥Â£Â¬ so you have a riskable quota of \$2000 per trade. Does it mean you can only use \$2000 in any single trade ? or you may have more than \$2000 to trade for single trade , but if your initial risk based on your initial stop should not be more than \$2000Â£Â¿

2. ### m_c_a98

It means that your share size(contract size) on each trade is based on the value of the account.

From your example in the E-mini S&P500 if you have a 4 point stop on a trade(\$200 per contract risk) you would trade 10 contracts for a total of \$2000 risk on the trade.

However, these position sizing schemes are irrelevant and damaging if you are not a profitable trader /or have a positive expectancy for a system and can carry it out.

Trade one lots until you can be consistantly profitable then worry about position sizing.

3. ### forex5x

100,000
risk % = 2% = \$2,000

Amount to risk per trade maximum
\$2,000

cost per tick or pip = \$10

One big position
Stop loss set to 200 pip or tick units
= \$2,000 loss maximum

--- OR ----

Several small positions
Stop loss set to 50 pip or tick units
= 50 x \$10 = \$500

2000 / \$500 = max of 4 positions

if your math gives you 3.8 positions round down to 3.0 positions....for added safety.

If you lose 2% you can withstand about 50 losses before your account is destroyed.

If you lose 20% you can maybe only withstand 4 or 5 losses and you are destroyed.

More important than winning is "not losing...too much."

Everyone wins and everyone loses but with good money management you can better withstand the loss and live to make the profit on the next trades.

As your account grows you may want to reduce your % at risk as your principal is more and more. It is one thing for example to risk 20% (danger) on a \$2,000 account but if you have a \$500,000 account then you are risking much more. You may want to risk the larger % when your account is small....knowing you can find other money and try again.

Finding another \$500,000 is more difficult.

It is a good idea to trade the smallest level you can as you go from demo to live trades...as pointed out in the previous post.

Trading real money is difficult....so take it slow and easy...keep the amount that you win or lose to very low levels for a period of time and slowly increase to the full 2% level as makes sense....LOGICALLY and not EMOTIONALLY.

Best of luck to you.

Forex5x

4. ### lescor

How much you are willing to lose if you are wrong

5. ### joesan

Thanks to all the very kind replys. Now I have a much clearer understanding of this method.

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