How do I calculate risk?

Nowler

Experienced member
1,243 129
Hello folks,
How might I go about calculating risk, in forex for example.

Say... a 1% chance of losing 20% in one month.
Even a good audiobook on the topic would be great.

Thanks
 

FXX

Experienced member
1,170 200
Risk isn't black and white although that's how most retail traders look at it. You have an acceptable loss as one facet and then you have the probability of that stop being hit and that is dependent on sentiment and risk events. It's very difficult to accurately assess. I use a trade management framework that includes many variables in a rule based system to manage a trade.
 

Nowler

Experienced member
1,243 129
Risk isn't black and white although that's how most retail traders look at it. You have an acceptable loss as one facet and then you have the probability of that stop being hit and that is dependent on sentiment and risk events. It's very difficult to accurately assess. I use a trade management framework that includes many variables in a rule based system to manage a trade.
So I guess the probability of an exit level being reached can be calculated by something like average true range, coupled with current sentiment and a sprinkle of near term fundamental releases?

I was listing to an interview with someone from Mann Capital I believe, and that's where I got the 1% chance of a 20% losing month notion.

I'm trying to focus my reading around risk management as of late, but apart from using what I know about technical and fundamental analysis to manage my risk, I do t really know what's what's.

I was kinda hoping I could get a black and white formula from someone :cheesy:
 

min6485

Member
50 2
Risk can be a very difficult item. So what I do is risk no more than 1% per trade. In a series set of twenty trades if I lost all twenty trades I will be down 20% of equity. This the format I use now if that were to happen where as there were 20 consistent losses at 1% that would tell me I have to tweet my set-up, or market I am trading, risk management. This is why one will want to have a good journal.
 

FXX

Experienced member
1,170 200
Personally, I risk 4% per trade
 

Nuadarne

Member
89 10
Some traders try to guess just to find the possible loss they may face. But you understand that this is helpful only if you know the market very well. The easiest way is to check your balance and multiply it by the risk level. This is the simplest way I know.
 

nnash

Junior member
18 4
I highly recommend picking up the book Risk Uncertainty and Profit by Frank Knight. Book is almost a hundred years old now and far more depth than any modern trading related book on risk.
 
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cantagril

Senior member
3,073 881
I highly recommend picking up the book Risk Uncertainty and Profit by Frank Knight. Book is almost a hundred years old now and far more depth than any modern trading related book on risk.

I've got this as a pdf scan. PM me if you want me to send to you .....but as far as edge of the seat material it's right up there with Keynes "A treatise on probability"* :) ....I can confirm that It's definitely worth a read though.

* no pdf on this one.
 
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nnash

Junior member
18 4
but as far as edge of the seat material it's right up there with Keynes "A treatise on probability"* :) ....I can confirm that It's definitely worth a read though.
Haha Treatise on Probability is so brutal. I have really never been able to get anywhere in it and I love Keynes mind from what I have been able to digest. Schumpeter is in the same group with Knight to me. Tough but not completely impenetrable.
I just think there is something about men of that age that there was most the good parts of modernity with almost no distractions. Such depth of thought compared to even a 50 page research paper today.
 

fibo_trader

Legendary member
7,062 124
Akin to giving Partial differential Equations to cats who can't do Arithmetic or Algebra but hey, who knows, somebody might step in and desire this knowledge and is prepared to study it as a college text and benefit vastly ............................

Say thanks to Charles, author of TAST and Practical Portfolio Risk Management chapter 42

Scroll down to page 603 for the formulas

 

cantagril

Senior member
3,073 881
Haha Treatise on Probability is so brutal. I have really never been able to get anywhere in it and I love Keynes mind from what I have been able to digest. Schumpeter is in the same group with Knight to me. Tough but not completely impenetrable.
I just think there is something about men of that age that there was most the good parts of modernity with almost no distractions. Such depth of thought compared to even a 50 page research paper today.
I wouldn't have described it as brutal so much as mind-numbing:p Re Schumpeter: If you like a good Austrian and you haven't already done so, the Austrian School are an interesting bunch to look at.....and right now their theory on the
Business Cycle is up there in lights as far as I'm concerned..... but then of course you have to factor in that I'm old git with too much time on his hands. I've got Mises' "The Anti-Capitalistic Mentality"in pdf and also "Capitalism, Socialism and Democracy" (your man Schump) if anyone's thirsting for boredom.

...and I nearly forgot: to my mind, probability and risk are part and parcel of each other - exploring conditional probability ( Bayes etc) can be rewarding, in all senses. You don't need a pdf as it's all up there on Youtube......
 
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