Quote from Kastro_316:
Hi there,
I am chaning up my risk management.
What do you all think is a good starting point/benchmark for a solid risk management plan for FX.
Something that will yield me in the positive if I have 1/3 winners.
Hmmm... 1/3 winners? Do you mean a success rate of 33.33%?
That really says nothing. You need to specify the profit factor of your trading method and also the ratio of average win to average loss.
P = success rate:
PF = profit factor
R = average win to average loss
The above parameters are related by the following formula:
P = PF/(PF+R)
If P is 0.3333 and R = 2 then if you solve for PF you get:
PF = PxR/(1-P) = 0.3333 x 2/(1-0.3333) = 0.9999
Ah... you are not making any money
Conclusion, given a fixed success rate, in your case 1/3, your only chance before you even start thinking about money management is to make sure your R is high enough. In your case then, you are probably talking something like trend following. Solving for R we have:
R = PF x (1-P)/P
For P = 1/3 and PF = 2, then R = 4 based on the formula above and this means to get a reasonable profit factor you need average winners 4 times as large as average losers.
Then, money management is easy. Just risk no more than 2% on each trade and after some time you will be rich.
A derivation of the formula I used can be found in the excellent paper by Michael Harris "Derivation of the Profitability Rule and its Application in the Discovery of Trading Systems Based on Price Patterns":
http://www.tradingpatterns.com/About_Us/articles/articles.html
Ron
