Managing risk exposure as a percentage

How this works:

This strategy is based on the amount of risk that is tolerated per trade. For example, if you use a technical configuration that requires a large stop, you would reduce the number of positions in order to maintain the same level of exposure. However, if you encounter a technical configuration that requires a tight stop, you can increase the number of positions you have while retaining the same amount of exposure.

If you're willing to take a predefined risk of .5% on your portfolio, you should always make sure that your risk exposure is always .5%.

Therefore, if you have a stop at 10 pips :

Formula:

[(Account size) * Predefined risk percentage] = Risk tolerated = RT

To find the size of your position, RT/Monetary value of the stop for 1 position = Size of the position.

Let's take a look at this example using real numbers:

I have $100,000 in my account, and I tolerate .5% risk per trade.

I trade currency pair X, where the value of a pip is 5$. My stop on this trade will at 25 pips. How big will my position be?

Risk tolerated = $100,000 * .005 = 500$
Risk tolerated per contract = 25 * $5 = $125

$500/$125 = 4 ; we can therefore trade 4 contracts at a time in this example.

Disadvantages:

You can't maximise your exposure according to the probability of an outcome occuring.

Advantages:

This system allows you to have a set amount of risk expressed as a percentage no matter how large your stop is.

Easy to calculate.

It allows you to gradually increase the number of positions you may take while retaining a set level of risk, expressed as a percentage of your account.