money management

[ramrob]

Hi I'm Rob. I am demo trading on Oanda right now. I have adjusted my fake capital to reflect what I am going to be live trading with in a few months, about 1500 USD. I am trading what is essentially the 3 ducks system which i have been succesful with and I am, more importantly, confident and comfortable using.

Anyway, here's my question. If someone says you should only risk 1-3% of capital, what exactly do they mean? Does that mean if the trade runs against me I should only allow myself to lose a certain dollar amount (i.e. 15$ if I am trading with 1500$) before I close the trade? That being said and if I am understanding the concept correctly, how do i choose how large my positions should be to make this concept work for me?

Also, can anyone explain the difference between risk management and money management?

Thanks, I expect immediate, articulate, and profitable feedback! Just kidding, I fully expect to be ignored.

~ramrob

 

[Rhody Trader]

Anyway, here's my question. If someone says you should only risk 1-3% of capital, what exactly do they mean? Does that mean if the trade runs against me I should only allow myself to lose a certain dollar amount (i.e. 15$ if I am trading with 1500$) before I close the trade?

Exactly. They are talking about how much of your account value you are willing to risk on any given trade.

That being said and if I am understanding the concept correctly, how do i choose how large my positions should be to make this concept work for me?

Work out where your exit will be if the market goes against you (your stop). Figure out how many pips that is. Then size your position such that the pip value of the position multiplied by the pips you are risking is equal to the amount you're willing to risk.

For example, if you're trading EUR/USD, have a stop 100 pips from your entry, and want to risk $1000, your position size would be 100,000 ($1000/100 pips = $10/pip)

Also, can anyone explain the difference between risk management and money management?

In common parlance they are interchangable terms.

 

[FXSCALPER2]

Risk management is mainly concerned with staying in the game. The idea is to be able to survive long enough so that you can exploit any edge you may have. The underlying thought being: in the short term, you don't know what is likely to happen but play long enough and, if you have an edge, you would win. If you run out of money, you can't trade.

Money management is about maximising the returns of your edge while minimising the risk of ruin. It is an answer to the question: given your edge and its expectancy, what is the best size you should put on each trade? Check out the Kelly formula.

 

[ramrob]

Great great answers. Thanks so much!