A Discussion Regarding Risk

I received an email today, with some excellent questions regarding risk, the SST and using the UTA (Ultimate Trade Analyzer) tool.   I thought it touched upon an important subject so I figured I would share the conversation here.


1. Can you help me on what to input in the cell H1 if I’m using $800 capital with leverage of 50:1, and a .01 lot size?  What value or point should I put using the EURGBP as the currency I’m trying to test?

For those of you who don’t use or know the UTA, cell H1 is where you would determine the pip value for the trade data you log into the UTA.

2. In the setup type column, what is the meaning of OSOB and RE? 


In response to your questions, I would first advise you to never use 50:1 leverage.    Just because your broker allows it, doesn’t mean you should.  In fact, in most cases, you should not.  With that being said, try to always keep your position size around the 2% of your available capital range.  So if you have $800, you would not want to put on a trade that risked more than $16.  That might not sound like a lot, but it is all relative.  As your account grows, so will the 2% risk level. 

Remember, Chris ‘Jesus’ Ferfuson turned $1 into $20,000 in two years, playing online poker tournaments.  He did it by never risking more than 5% of his bankroll on any tournament.  He did the math, and based on his skill level, and his estimate of how often he would make the money round on any given tournament, he decided that a 5% risk model would keep him in the game.  And it did!  His first tournament he entered had a 5 cent buy in price.  He didn’t raise that level until he doubled his bankroll to $2.  Then he began entering 10 cent buy ins, etc, etc..  In two years he built his bankroll up to $20,000.  This is the type of mindset you need if you want to succeed as a trader.

The SST gives you a serious edge.  In fact, it’s better than 50% by a long shot.  Still though, we are recommending a 2% risk profile based on the average size loss over a period of 100 trades or more.  What that means is that once you have over 100 trades entered into the UTA, you will be able to determine the average size loss and from that detail, determine the proper risk (2%) that you should put on a trade.

(I forgot to mention, that you would also need to convert the underlying currency of the forex pair into the currency of your trade account so that you could determine the proper pip value and thus, the proper lot size to stay within your 2% risk parameter.)

If you want to get a .01 lot value for each trade’s wins and losses, first you have to decide if you will be using the decimal point or not.  When I enter a trade into the UTA for forex, like the EURUSD for example, I don’t want to enter a price 1.3318 for example.  I like to just enter 3318.  It saves me 2 key strokes on every price entry, which adds up to a lot of saved manual work for me.  In this case, if a pip is worth 10 cents, I would enter .10 into H1.  That way, each digit would gain or lose .10.  Don’t worry about multiple quantities when backtested with the UTA.  It is not designed for that.  Backtest as if each trade is 1 lot per position.  If you want two positions, you have to enter two trades, one on each line.  They would get the same date, dame time, same entry price but different exits and different SetupType labels. 

As far as your 2nd question, OSOB (overbought/oversold) is what I used to label reversal trades and RE is what I used to label Reentry trades.  You can edit those labels and use this powerful feature any way you like.  With the SLV tradeplan I made available to the Live SST Workshop Attendees, I offered a variation where I used that labeling technique to label various targets instead of trade setup types.  You can use it for anything you want, really.  The benefit is that it will pull out specific sets of statistics which can really open up important insights and help you with your tradeplan.

There is a fine line between not enough risk and too much risk.  Trading does involve risk.  Without risk, we could never make money as a trader.  Risk is an important part of trading, right?  But how do we determine the appropriate amount of risk?  This is always a question that befuddles traders.  It’s a razor’s edge that doesn’t stand still.  One’s risk exposure is as dynamic as the price movement itself. 

The SST philosophy, which incidentally, was determined by extensive work with the UTA, is to cut risk as quickly as possible, while still giving a trade the space it needs to develop.  In other words, it is handling risk in a dynamic way, constantly retuning its risk profile with the close of every new bar.  Pretty cool, huh?  Next, its goal is to eliminate risk altogether by getting our trade to a risk free position.  In other words, at the strategic price level or strategic stage of the trade’s development, it will move the stop to lock in a pip/tick or few.  It is trying to mitigate risk by skirting the fickle razor’s edge line between too much risk and not enough risk.  It is not 100% perfect.  Nothing is.  But it definitely puts the statistical edge on our side and really, that’s all we can ask for as traders.  That IS, the holy grail, by the way..  Harnessing risk so that it works for you on most trades but also being able to control it, when it works against you.

While doing that, it also calculates a fixed target, dynamically based on the current trade setup, that has a high likelihood of being reached.  Sometimes that fixed target is too small and would cut short the overall potential of the trade.  The SST answers that problem by allowing us to keep a seperate position on, incorporating its trailing stop techniques.  That way, we are able to strike a great balance between not enough risk, too much risk, and a great chance of having just the right amount of risk from a trade profile perspective.  It elegantly takes into account the 7 keys to successful trading, or as we call it, the 7 summits, tying together dynamic trade profiles, the dynamic ability to apply the strategy on multiple markets and timeframes, the ability to scale position size in and out of trades, the ability to trail while also being able to exit at high percentage fixed targets that have been dynamically tuned to the current market condition, capital preservation and consistent profits.

As traders, the rest is up to us.  It is the trader who shoots himself in the foot by putting on too much risk on any given trade.  It is the trader who makes decisions that are outside the realm of the tradeplan or the methodology of the trade system.  We have the tools.  The UTA can be used to determine the ‘soundness’ of a tradeplan and to build your confidence to the point where your vision is broad enough to believe in the tradeplan and methodology.  Once you have that belief, you can responsibly put on the proper risk, and trade the system as it is intended.  Thus, you can achieve the statistical edge that the SST gives you and grow your account accordingly, as you facilitate the tradeplan with confidence and professionalism.

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