Risk on Trade Value and Margin Used

[tradespreads]

This is a Trading 101 question.

When you are risking a trade, what do you base the risk on: Is the risk on the Trade Value or on the Margin?

Some products/markets are leveraged and thereby the margin requirements of trading there is a fraction
of the actual Trade. Because of leverage offered.

Is the risk taken on the Trade Value or on the Margin?

 

[TWI]

When I decide to enter a trade I know where I will get out on the loss side, rarely on the profit side as I try to run things in that direction. Once you know where you take the loss you know what it will cost to take the loss. If I know what I want to risk on the trade either as % of account value or simply a set amount of dollars then I divide this amount risked by the cost of 1 unit hitting my stop loss and that determines how many lots I should buy or sell.
The only important thing here is how much you can lose when you are stopped out, once you know that then you know the risk.
If you want to know the value of risk in a portfolio then you need to calculate a Value at Risk which gives a probability, usually a 95% 1-day probability of boundaries of profit or loss on a given day for your portfolio. It is always worth knowing this figure as it gives you a good relative indication of what you are really putting at risk daily and includes components which account for any diversification benefit you may have between different products.

 

[tradespreads]

Thanks for the explanation.

 

[toknees]

I'd encourage you to factor 2 risk numbers in to your system. The first is, as mentioned, your stop - the point at which you are prepared to accept you're wrong. This is 'the cost' of the trade. When entered, you should consider it money spent until the trade is closed. The second is the 'black swan' event risk. It's the second that is so often overlooked, and the cause of many a hedge fund bankruptcy or broker breakdown. You'll need to investigate far back in time in some cases, but you should have an idea of the very worst case scenario. I like to think of it as the WWIII scenario - something that could come along and destroy you. This is particularly relevant if you're trading assets like stocks that are closely linked. Market crash, and they'll all go down. You want to ensure that in the event of total collapse your capital is sufficient to 'survive' - ie. it would really suck, but you could continue trading and get it back! It's the sort of thing you hope will never happen, but as we know, more often than we'd like, these things do happen. If you don't plan for them, you stand a decent chance of being put out of business - maybe not today, maybe not next year, but one day!

 

[tradespreads]

Sensible advice.

 

[billyjean]

talking about his risk, you may found it's counted from losing trade based on pips scale out.
but actually when many expert said 2% risk per trade it's simply based on our margin.
said we had 1:100 account leverage, 5000 USD deposit amount. when we planning to put 2% risk means it's 2% based on margin requirement, 100 USD are 2% from 5000 USD, in other words it's equal to 0.1 lot size.

 

[tradespreads]

Thanks, that was my precise question.

 

[gerryg]

This is a Trading 101 question.

When you are risking a trade, what do you base the risk on: Is the risk on the Trade Value or on the Margin?

Some products/markets are leveraged and thereby the margin requirements of trading there is a fraction
of the actual Trade. Because of leverage offered.

Is the risk taken on the Trade Value or on the Margin?

Well in the upshot your money is sucked out in case of loss, so I build my MM on basis of managing my account equity. Doubt, assessing risk based on trade value will bring appreciable results