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Proper Use of the Risk Multiplier

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  • Proper Use of the Risk Multiplier

    Nick you may want to consider making this post a "sticky note" so it doesn't get buried, I think this should be required reading for all your members. Just my opinion.

    When it comes to considering trading a signal at anything over 1X, there is one thing you MUST do:

    CONSIDER THE "BEST CASE", BUT PLAN FOR THE "WORST CASE"

    I have been an active member at LFT.org for about 6 months now and have heard the cries of traders who's accounts have been decimated trading "safe" signals like AMP, Pendy and now Viper. All three of these guys are very good traders (even Pendy, he had a error in judgement on the last trade, but I feel he will recover). As good as these guys are, they are all susceptible to taking losses at any time, and even at breaking their rules.

    The allure of the Risk Multiplier function in Simple Trader is that you can trade a "safe" signal that may turn a relatively low % gain with low draw down at an "Amplified" rate to multiply your gains. The Risk Multiplier is an excellent tool, but needs to be used responsibly and intelligently to be effective. When examining a trader like Vipers performance, it is very tempting to follow his signal at 5-10X risk. With a minuscule closed draw down if just over 2%, "on paper" you stand to gain over 130% in 6 months while risking no more than 22%...that almost seems like a no brainer, right? WRONG! While Viper has a stellar track record, his systems allows for up to 10% open draw down before he closes out. This is the "Worst Case" but needs to be part of your plan. At 10X it will only take this happening 1 time in 5 years to COMPLETELY RUN YOUR ACCOUNT TO RUIN. While in the meantime, for Viper it will be little more than a speed bump that he will recover over the course of 2-4 months.

    I'm sure your intelligent enough to do the math for anything other than 10X so no need for other examples. Here are some things I have heard from traders for why they crank up the risk.

    "I need to increase the risk, my account is small and I need to overcome the signal costs"

    If you cant afford to trade a signal at 1X profitably or you can't accept the "worst case" then you cant afford to trade that signal. Period.

    "The trader never let a trade go this far before"

    You need to do better due diligence. If the trader posted his "worst case" and you were not aware that his "worst case" was much worse that the 6 months of trading results that you "see" on myfxbook, then you need to ask questions and do a better job with your research. I know some of you are new this and as my Dad would say..."First time, shame on you, second time, shame on me" (Right Nick?....hehehehe)

    "The trader has not had a loosing month in years, I thought I was safe."

    Welcome to the real world. Did you really think that someone can just trade forever without having a loosing month?

    There were a few others, but you get my point.

    What you have to understand is that the trader trades at "1X". Once you start trading at a multiple, even a modest 2X, YOU HAVE TAKEN THE RESPONSIBILITY OF MANAGING RISK AWAY FROM THE TRADER AND HAVE PLACED THAT RESPONSIBILITY ON YOURSELF. The main reason for coping the trades of a "professional" should not be because they have some "secret sauce" way of making money. The reason guys like Viper, AMP, and TA are profitable is because they understand HOW TO MANAGE RISK!!!! So why take that away from them? The reason YOU cannot make money trading for yourself is not because you cant read a chart, it's because you have not mastered the skill of managing risk, so why are you taking on that responsibility?

    Now I am not going to say that it's bad to use the risk multiplier. But IMO to use it properly, your going to have to set your own "max draw down"...it can be either the traders max draw down, or a level that you are comfortable with. Your a big boy (or girl) and elected to take on the responsibility of managing risk, so set your stop and let the trader do his job. If he goes beyond your "comfort zone", your covered. If he breaks his rules, your covered. I really recommend setting your own max draw down even if your trading at 1X, you never know what may happen.

    By doing this, you can take advantage of winners, while capping your losses. So in effect your getting the best of both worlds. The only drawback is that you may wind up stopping yourself out of trades that the trader winds up profiting from, but hey, you took on the responsibility of managing risk, so welcome to the real world!....hehehehe

    Remember guys, when it comes to risk, consider best case, plan for worst case.

    Peace!
    Last edited by Turtle Forex; 12-02-2013, 07:00 PM.
    "The trend is your friend - until it bends at the end"

  • #2
    Great words and absolutely right !

    Comment


    • #3
      Thanks for this post. Really does allow investors or traders to sink in with your wording and phrases, it's a real discipline. This should have been one of the main threads for anyone new to this site to be honest as a first read!

      P.s- I enjoyed reading it too and I have slapped my inner self many times for obvouis reasons!

      Comment


      • #4
        Originally posted by Turtle Forex View Post
        "I need to increase the risk, my account is small and I need to overcome the signal costs"

        If you cant afford to trade a signal at 1X profitably or you can't accept the "worst case" then you cant afford to trade that signal. Period.
        I totally agree.

        Just wait and follow your chosen trader when you will have enough money.

        Too big risk multiplier and you will lose your whole account, even small one + you won't recover if you don't have funds.

        Joe, this is very well written and extremely valuable !

        Comment


        • #5
          Great post Joe,

          Very wise words indeed. And timely.

          Riddle me this though LFT team?

          1) On the Viper page it says 'Minimum Recommended Investment $500.00 USD'.

          If I ran Viper at risk x1, @ 2.44% per month I would stand to gain $12.20 profit.

          After paying $99 for the signal, + lets say $30 for a share of a VPS, we'd be looking at a net loss of $116.8
          Yearly, this signal could cost me 1.4k to run.

          So, shouldn't the min. recommend investment be exactly that? The min. recommended investment to BREAK EVEN each month whilst running the signal at risk x1. This would be ~ 8k. So lets round up to 10k.

          It would seem like the signal signup page is recommending potential subs to lose money, or take unnecessary risk.

          I think this is a major part of the problem. Subs see the min investment of 500 bucks and say WOW I have 500 dollies. But then the reality sets in that they only stand to gain a measly 12 bucks, so they look around for ideas, and see Nick running the account at x10 risk and say 'HEY I CAN DO THAT'.

          And the rest is history

          2) Nick's x10 account.
          Even though originally I was intrigued by this concept and the idea of this, and even considered it myself. Now, in hindsight, I think it was a terrible idea. Foolish for a sub, but even more so for someone in Nicks leadership position on the site (with all due respect Nick naturally).

          Nick - even though you didn't advertise this account, and even though you said one million times that it could blow, this wasn't enough. I think by just having the account in the first place gives subs the wrong idea. It plants the seed in their mind that "if Nick can do it, so can I - coz Nick's a smart dude, so those warnings must just be for legal reasons right. Viper looks safe, theres no way he'd blow MY account".

          Viper is an outstanding trader IMHO, and it is because people ran his signals at a foolish level of risk, that his trading was brought into question. If everyone had run no more than 2 or 3 times leverage, no one would even be watching him trade as it's kind of boring!

          Trade safe guys. And if you overleverage, own it - and don't blame the trader if it blows up in your face. And if you are unsure, then demo until you are.
          Last edited by timo; 12-03-2013, 01:21 AM. Reason: terrible grammar, sorry.

          Comment


          • #6
            Base on my learning curve & being the #1 complainer on this site trying to make you all see the exact point timo talks about having the net loss each month..... There's no way to recover from a loss once you have the loss going. I'm in a loss with Viper now because of my risk was set to low and when I set it high enough and things were going GREAT then cad trades took over. The only way to recover from a provider is up the leverage on the account or risk 1-2% more than what's recommend on the control panel & make sure to never risk more than a certain LOT SIZE. I use Lot Multiplier with Maxed Lot size because this emulate what the Trader does with my account. If he does 2 lots my account does .20 lots base on my account size. Anything lower than 2 lots will be .17.. Always use a certain max lot size specially if you have more than 1 provider.
            ..
            if the fee is $99 you need to at least 10 trades @ .10 or .15 lot size, .10=$1/pip - .15=$1.50/pip making at least 5-10 pips each trade, for EUR/USD as example. just to break even with a little profit. You have to make the correct adjustments and risks to justify the fees... if you don't there's no point filling someone else's pockets with your money, your better off keeping your money and putting into a Savings account at a local bank make .30 cents a month on it.
            ..
            My experience with this simple trader deal is - Proper risk 2-3% each provider. $2500 account size minimum for more than 1 provider "$2000 is ok for just 1 provider. Never trade higher than .20=$2/pip until you grow the account to the next $1000 mark. Each $1000 you make increase lot size by .05 ( for those with more 1 pro) if you only have 1 provider go higher add .10 to the lot size and make sure to bump up the max lot size...
            ..
            If you catch 1 of Nicks great email deals with a provider. It's best you take it and proceed with caution, risk lower than usual until you get a good feel for the trader and ALWAYS do the MYFXBOOK testing and research process before you pay for another month of service. Make sure the trader is always going to be profitable each month and makes more than what the signal cost.
            ..

            My risk chart with only 1 Provider
            $ 2000 - .10 lot
            $ 2500 - .10
            $ 3000 - .15
            $ 5000 - .25
            $ 5600 - .26
            After your gains get better its okay to start moving the lot size up per $100 by .01 lots.
            ..
            Hope this helps
            DETACH YOUR MT4 CHARTS Now Available. - Trading as a hobby is realistic.

            Comment


            • #7
              Hi Eric,

              Thanks for the analytic post.

              I'm glad you're now considering the correlation between the monthly cost, predicted return and account size required.

              The risk multiplier is easier to use for this in my opinion.

              Let's use FX Viper as an example.

              Average monthly return is 2.37%
              Maximum drawdown to date is 13.81%
              Monthly fee is $99USD per month

              So the calculation is $99/0.0237 = 4,177

              Therefor you would need an account of $4,177 to break even if you were trading default risk to pay for the cost of the subscription fees and past performance continued.

              Personally I think you need around $5,000 at a risk multiplier of 2 or 3 to make the subscription worthwhile.

              Under the 3x risk scenario the calculation is $5,000 x 7.11% = $355. Less $99 per month you can expect to make $265 profit per month (5.3%)

              It's not a huge amount of money intially, however it's sustainable. Give me $5,000 compounded at 5.3% per month for the next 5 years and you will have a balance of $120,000.

              Show me another investment vehicle that can generate that kind of return! (this is why I love forex)
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              Comment


              • #8
                Hi Nick, When I put the calculation $5,000 at 5.3% monthly over 5 years into the compounding calculators it comes to $5808.08 and not $120,000. This is quite a difference and I'm wondering if your calculation was correct?

                Comment


                • #9
                  Khybee I think safe to say you need a new calculator. 800 profit is 16%. 5.3% per month over 60 months does not equal 16%...

                  Sent from my Nexus 5 using Tapatalk

                  Comment


                  • #10
                    Originally posted by Khybee View Post
                    Hi Nick, When I put the calculation $5,000 at 5.3% monthly over 5 years into the compounding calculators it comes to $5808.08 and not $120,000. This is quite a difference and I'm wondering if your calculation was correct?
                    you will acheive 5808 in 3 months. Khybee? are you still sleeping or in hangover :P
                    Trade the market, not the trader

                    Comment


                    • #11
                      Sorry I feel like an idiot these online calculators are obviously compounding the 5.3% on an annual and not monthly basis. Thanks for putting me straight

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                      • #12
                        Can someone from LFT confirm the risk multiplier function is in fact related to base account currencies. No one in the trading room could confirm which means there is confusion. I was of the understanding that if I have AUD account then follow a USD master such as Smart or Viper, then I put my risk @ .91 right now. Or do I just leave it @ 1? When I copy TA I leave it @1 because his master is also in AUD. What's the correct answer so that we can all finally know for sure.

                        Comment


                        • #13
                          Originally posted by Big River Man View Post
                          Can someone from LFT confirm the risk multiplier function is in fact related to base account currencies. No one in the trading room could confirm which means there is confusion. I was of the understanding that if I have AUD account then follow a USD master such as Smart or Viper, then I put my risk @ .91 right now. Or do I just leave it @ 1? When I copy TA I leave it @1 because his master is also in AUD. What's the correct answer so that we can all finally know for sure.
                          Hi BRM

                          as far i know, the risk multiplier does not take the value of the currency in to account. Say if the master is USD and the client is AUD and both are trading at 10k USD and 10k AUD, simple trader EA treasts this as same, even though its not the same value, if the master opens a 0.1 lot size, client gets the same 0.1 lot size, so yes your risk settings at the moment are correct.
                          Last edited by SmartTrader; 03-23-2014, 07:01 AM.
                          Trade the market, not the trader

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                          • #14
                            Right now I follow you @ risk .68. The aim is that I actually want 75% risk or 0.75. So I would really like to know if I need to keep doing this from the moderators, I mean not just me but the community here as a whole. So you say it doesn't matter at all, I should just put Smart risk @ .75?

                            Comment


                            • #15
                              Originally posted by Big River Man View Post
                              Right now I follow you @ risk .68. The aim is that I actually want 75% risk or 0.75. So I would really like to know if I need to keep doing this from the moderators, I mean not just me but the community here as a whole. So you say it doesn't matter at all, I should just put Smart risk @ .75?
                              what i meant is for simple trader EA only the number is important, not the currency. if you have 7000 units of currency A and i have 7000 units of currency B, both are treated as equal. so if you follow me at 0.75 and your currency is AUD so you will be basically taking the risk of 0.825 as you need to have 100 AUD for every 91 USD that i have in my account, i hope i havent confused you. say your currency and my currency are equal and if you want to follow me at 0.75, you will just change the risk multiplier to 0.75, But here AUD is lesser value, so you should follow me at less than 0.75.
                              Last edited by SmartTrader; 03-23-2014, 09:18 AM.
                              Trade the market, not the trader

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