2 Percent Risk with 2R Multiple

I’ve been emulating my real account trades with my demo account for the January forex trading contest.  I’m currently in first place with a return of 11.16%.  After today though, my return will drop 2 percentage points to about 9% since I lost 2% on a trade.  I don’t know if this will be enough to hold on to the lead.  

This is an overview of how I’ve been trading so far in January 2008: 

1. I have been risking exactly 2% on every trade.  No more, no less.  
2. I’ve been using my forex position size calculator everyday when figuring out my trade size and find it very handy.  Some of you have commented the same.  
3. My R-multiple on every trade has been 2R.  For those of you that haven’t heard of R-multiple, it’s really just an abbreviation for reward-to-risk.  2R means my reward-to-risk is 2:1.  
4. I’m not watching my positions so there isn’t any fancy money management going on.  I haven’t once set my stops to breakeven. I’m just letting them ride.  If they hit my target, they hit it.  If they don’t and stop out, so be it.  This is quite different from what I’ve done in the past.  In the past, I’ve been quick to set my stops to breakeven when they move a little in my favor.  The consequence of doing this was typically a gain/loss of zero.  I can’t tell you how many times I’ve moved my stop to breakeven only to see it get stopped out.  Then I have to watch as the price goes back in the direction I was trading where it hits my initial target price.  This to me was more frustrating than losing.  I’d rather stick to my guns on a trade instead of playing it scared. 

Popularity: 9% [?]

Took My First Trade In Months

I took my first trade in months this past Thursday.  I have been slowly trying to get back into the forex market by cautiously watching the GBP/USD.  It's been a while since I followed any currency pair so I wanted to be sure that I watched the GBP/USD for a couple of days before taking any trade.  I've decided to start referring to my profits/losses in terms of expectancy.  Expectancy is "simply the mean or average R-multiple generated."  (Source:http://www.iitm.com/sm-Expectancy.htm)

The "R" in R-multiple is short for risk.  The best way to understand it is to either read the source above or continue reading.  Let's take my first trade as an example.  I knew my total dollar risk before entering the trade, that amount being $650.94.  (yes, that exact)  I exited half of my position when I had profited $329.  I moved my stop to breakeven on the remaining position.  Unfortunately I was stopped out on the rest giving me a total profit of $329.  To figure out the R-multiple, you would take (profit / amount risked) which in this case was $329/$650.94 = .5R.  Ideally, the higher the R in a profit situation, the better.  For instance, a 2R multiple would be obtained in a 2:1 reward/risk trade and a 3R multiple in a 3:1 reward/risk trade.   In a loss situation, a higher R is actually worse.  Ideally, if you lose on a trade, the R-multiple should be 1R or less.  If it's 1R, it simply means that you lost the amount you were expecting to risk.  So in my above example, if I lost $650.94 on the entire trade, my R-multiple would have been 1R.  Let's just say that I got stupid and decided to stay in the position and not honor my stop loss setting.  Because of this stupidity, let's also say that I wound up losing $1301.88, twice as much as my initial risk.  Calculating using (loss / amount risked) I would have an R-multiple of $1301.88/$650.94 = 2R.  

So what does all of this mean? Well, I only have 1 trade to calculate my expectancy which would currently be .5R.  I'll get more into calculating mean expectancy once I've compiled more trades.  But having .5R isn't desirable because it basically means that I risked twice as much as the reward I obtained.  This is exactly why I want to try to use R-multiple when I talk about my trades because even though I had a $329 profit on my first trade, it isn't as rosy as it may seem.  The R-multiple was only a .5R and although it was profitable, if I trade this way in the long haul, I'll surely lose.  

Another good source that also mentions the critics of R-multiple can be found at http://tradermike.net/2006/09/r_r-multiples_defined/

Popularity: 10% [?]

New Forex Calculator

Phil McGrew sent me a note to announce his release of a Forex calculator.  This calculator is pretty handy, particularly the position size tab which will calculate position size based on input variables such as equity, currency pair, risk in %, and risk in pips.  The following are the rest of the features:

• Interest rollover calculations based on currency pair
• Currency pair correlation for three different durations, 5 day, 20 day, and 100 day
• Currency quote
• Margin calculation

I know there are probably other calculators out there that perform the same but he and his programmer(s) took their own time to develop this and offer it for free so I figured I would mention it.  It is a windows application (not web-based).  If you're interested, you can download here:

http://currensys.com/forums/viewtopic.php?t=447  

 

 

 

 

 

 

 

 

Popularity: 4% [?]

Forex Risk Calculator Released

After weeks of development, the first beta release of the Forex Risk Calculator has been released.  The calculator on the surface doesn't look too involved but believe me, there are a lot of calculations, logic, and validation that had to be taken into consideration.  This calculator has all the functionality of the Excel FX Risk Calculator released from Alex Douglas.  In it's simplest form, the risk calculator helps you manage risk.  Ideally before each trade, you should know exactly what your entry price, stop loss price, and target prices are.  After inputting these values, your account balance, and intended position size, the calculator will "calculate" your available leverage, pip profit, pip loss, profit at target, and loss at stop.  In addition it calculates the most important values, the percentage of your account at risk and the percentage reward.

The calculator is programmed using AJAX (Asynchronous Javascript and XML) so it's responsive and fast.  There is also no need to hit any submit button.  

Just be aware that this is a beta release so it's not perfect.  This will come in time and I use it more and more.

http://www.forexcalc.com

I also added a link to the left Forex Resources menu.

Popularity: 6% [?]

Trading the News Redemption

With the threat of falling to unprofitability after 4 weeks of automated news trading via FXEngines, redemption prevailed this morning.

My automated moderate trade entered long on the EUR/USD at 1.2724 at 8:30:58 and closed about 15 minutes later at 1.2759 for a 35 pip profit. 

So after 4 weeks and 17 trades, I'm up 48 pips.   I remain suspicious of this method of trading but it makes me realize even more how important risk and reward are.  Typically a losing news trade will cost me 10 pips.  In 4 weeks, I have 7 wins and 10 losses for a win percentage of roughly 40% yet I remain profitable. 

I'm done trading for the week.   It's time to take an overdue weekend break.  We have the 4th of July holiday on Tuesday of next week so I'm not sure when I'll jump back into the market.  

Popularity: 3% [?]

Channel Trading in the Morning

Does anyone channel trade the US Session? I've been doing so here and there but have been keeping track of any and all channel breaks during the past 3 weeks in the following currency pairs:

• GBP/USD
• USD/CAD
• AUD/USD
• USD/JPY

I think that I can say that from my limited observations over 3 weeks, these pairs definately move more consistently in the morning US session than others.

Another observation I've made is that the AUD/USD seems to be a great pair to trade.  I never would have thought this was the case but I've found it to be very steady once the price breaks a channel line.  If anyone has traded the GBP, you know the wild swings that occur frequently but it doesn't happen in the AUD/USD.  Once the channel breaks, it takes its time to reach a bit of profit but it eventually does.  Over the last 3 weeks, this pair has 7 wins and 1 loss.  Run-ups have ranged from 30 pips to 90 pips with the average around 30-40 pips.  The drawdowns have been very good with a maximum of -18 pips.  This is assuming that your using a 20-30 pip stop.   This pair actually was good for 30 pips today for me and helped me bring my losses down to around -50 pips.

Let's assume that your risk/reward is 1:1 for simplicity.  If you have a 30 pip stop and a 30 pip limit, here was the performance of these 4 pairs over the last 3 weeks.  I should note that the runups on some of these trades were substantial so if you rode it out for longer, the risk/reward would have been much greater.

GBP/USD – 4 Wins, 3 Losses (+30 p)

USD/JPY -  6 Wins, 3 Losses (+90 p)

AUD/USD – 7 Wins, 1 Loss (+180 p)

USD/CAD – 8 Wins, 4 Losses (+120 p)

I pick and choose my channel break trades and therefore it is discretionary.  I find that I don't pick the right one though but if I was to take every channel trade over the last 3 weeks, I would be up 420 pips and this is with a 1:1 Risk to Reward. 

Popularity: 4% [?]