FXBug - Risk Management 101
By Aaron Hazell
As you have seen in the table on the first page, small changes
in %Risk can affect your account balance quite a bit both in the
short term and the long term. That being said the best advice that
I can give is for you to set a level of risk that takes into account
this information. High risk can bring great rewards, but you wont
last long when your losses stack up. Avoid the 'perpetual comeback'
scenarios!
Top line 'personal review' of progress
Another thing you can do is track your progress from day to day,
this really helps you see exactly how well your doing over time.
It also helps project profits moving forward if you are adhering
to good risk management. One of the tools I use to accomplish this
is a simple excel sheet that does much of the calculating for me.
I set the Risk% and it quickly calculates the cost of a 30 pip stop
loss and projects 10 losses and % Drawdown to really highlight the
potential risk of your position sizes.
Excel sheet example:
Goals/Targets
I also like to use a Daily Target based on the account balance,
setting this target also calculates a position size and the $ number
that your shooting for - with those it calculates how many pips
that you need to actually succeed. It's not rocket science, pretty
elementary really but setting your Risk, and Daily Target that your
comfortable with, all you do is update your daily finish balance
after daily rollover. Do your best to set realistic targets, and
dont let your targets force you to be more aggressive than normal
just to hit them. They are just numbers, sometimes you will hit
them, sometimes you won't. In the end with good risk management
you will succeed.
Bottom line... your level of risk should allow you to survive a
good string of losses with enough capital left in the account to
bounce back. Always follow your risk rules and follow your progress
closely - anything can happen at any time so please be careful.
Sample Daily Progress sheet:
I filled in some numbers so that you can see how the sheet looks
in action, all you need to do is enter data into the purple cells.
Comments are welcome.
.xlsx
Office 2007 version*
.xls
Office 97-2003 version
*- Uses Office 2007 rules to colour some cells based on values.
(i.e. Red for negative, green for positive)
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