Hi there, I am chaning up my risk management. What do you all think is a good starting point/benchmark for a solid risk management plan for FX. Something that will yield me in the positive if I have 1/3 winners.
Hmmm... 1/3 winners? Do you mean a success rate of 33.33%? That really says nothing. You need to specify the profit factor of your trading method and also the ratio of average win to average loss. P = success rate: PF = profit factor R = average win to average loss The above parameters are related by the following formula: P = PF/(PF+R) If P is 0.3333 and R = 2 then if you solve for PF you get: PF = PxR/(1-P) = 0.3333 x 2/(1-0.3333) = 0.9999 Ah... you are not making any money Conclusion, given a fixed success rate, in your case 1/3, your only chance before you even start thinking about money management is to make sure your R is high enough. In your case then, you are probably talking something like trend following. Solving for R we have: R = PF x (1-P)/P For P = 1/3 and PF = 2, then R = 4 based on the formula above and this means to get a reasonable profit factor you need average winners 4 times as large as average losers. Then, money management is easy. Just risk no more than 2% on each trade and after some time you will be rich. A derivation of the formula I used can be found in the excellent paper by Michael Harris "Derivation of the Profitability Rule and its Application in the Discovery of Trading Systems Based on Price Patterns": http://www.tradingpatterns.com/About_Us/articles/articles.html Ron