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I have some doubts about "small risk". I think "risk" should contain two parts: one is the "distance" between the entry point and stop, just as al always says, and the other is "postion size".
risk = distance * position size（lots)
I think "risk" is money,not only distance.
As al said before, we should make sure that the expected loss of each transaction is the same amount of money, that is, if the distance is large, positoin size should be small... In other words, the "risk" of each trade is the same, but the success rate of profit is different. So there is no such thing as a "small risk".Is that right?
This is a problem that has been troubling me for a long time.
Hi Peter,
I believe you are overthinking this risk topic. It is all relative. If on an MTR I decide to set stop just above the high (or low), AND I only want to trade 1 contract, then I have set minimum risk - the smallest risk. But if I want to max out position size to say 2% of account, I might trade 5 contracts or more. The 5 contracts would then represent a "large risk" but it is 100% in my control. I decide what risk to take.
If I traded 2% of account on every trade, wherever the stop needed to be, yes, the $ risk should be the same. So no "small risk" in that sense other than distance to stop, and probability of success as you noted - eg 40% for an MTR, 60% or higher for a breakout.
So then depending on what setup we take, we could say "small risk" for a breakout, "large risk" for an MTR when taking account of probability, right?
As Al says often, do not just look at risk alone. You should not be seeing risk as a problem, just a math calculation under our control.
Trust the above is useful. I feel I have written too much and confused topic more! 😎
If I traded 2% of account on every trade, wherever the stop needed to be, yes, the $ risk should be the same. So no "small risk" in that sense other than distance to stop, and probability of success as you noted - eg 40% for an MTR, 60% or higher for a breakout.
Hi，Admin：
Thank you for your detailed answers. Up to now, there are still some things I don't quite understand.
In a real FOREx margin transaction, would you use a fixed number（eg: 1 contract for 40% ,2~3 contract for 60%) based on Probability for each transaction? Or use x% of account?
I think I’m overthinking yet I like this kind of topic.
I’m a forex trader who use fixed percentage of account for initial risk, and it often bugs me too when I’m watching videos.
This is my interpretation.
Position size (determined by distance) is a risk for your account. It’s not part of price action or trader’s equation.
How much you take more position doesn’t affect probability of success. It’s even worse for long term, increases probability of ruin.
Distance is a risk of market. It’s part of price action and trader's equation. It does affect probability of success. Significantly.
Al usually means "shorter SL distance compare to TP target" by "small risk". Or simply tight stop.
As an trader who use fixed X% position size all the time, I know it doesn't sounds like "small risk" much.
But Al is talking about distance, a price action, not your account.
If I traded 2% of account on every trade, wherever the stop needed to be, yes, the $ risk should be the same. So no "small risk" in that sense other than distance to stop, and probability of success as you noted - eg 40% for an MTR, 60% or higher for a breakout.
Hi，Admin：
Thank you for your detailed answers. Up to now, there are still some things I don't quite understand.
In a real FOREx margin transaction, would you use a fixed number（eg: 1 contract for 40% ,2~3 contract for 60%) based on Probability for each transaction? Or use x% of account?
Hi Peter,
Whatever you do, just keep key issue of not exceeding the max x% of account for any trade you place. Then yes, if you want to trade smaller than your x% for a low probability setup that can work fine, allowing you to add on if trade works. If a high probability trade, then going all in on your max x% is fine too.
Again, the max position size rule is to keep us in the game by not losing too much, too soon. If we suffer a losing run (as we all do now and again) a sensible max x% (say 2% for experienced traders) will help us survive. A higher rate of 5% can blow our account.
Here's a useful book review showing position sizing of 2% vs 5% near end:
VAN THARP Trade Your Way To Financial Freedom (Expectancy in Trading & Position Sizing)
I have some doubts about "small risk". I think "risk" should contain two parts: one is the "distance" between the entry point and stop, just as al always says, and the other is "postion size".
risk = distance * position size（lots)
I think "risk" is money,not only distance.
As al said before, we should make sure that the expected loss of each transaction is the same amount of money, that is, if the distance is large, positoin size should be small... In other words, the "risk" of each trade is the same, but the success rate of profit is different. So there is no such thing as a "small risk".Is that right?
This is a problem that has been troubling me for a long time.
Hello Peter,
Al Brooks usually talks about "trader's equation", I believe it's something commonly known as Expected Value (EV). An EV of a trade (or a trader) is calculated as follow: EV = Reward * Win rate - Risk * Loss rate. For example, you participate in a coin toss bet, if you win you get 6$, if you lose you lose 4$, the win-loss rate is 50-50. So averagely, you get 1$ for each trade if you perform enough trades. So, when we talk about "small risk", it is small in relation to the potential reward in the above equation. If we always risk 2% per trade, a small risk trade would win us 6% 8% 10% or even more. Hope I answered ur question.
