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Chapter 33, Part I. Risk Management Framework. Page 4

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 28, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

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    Pipruit: I know this already!
    Commander in Pips: Ok, and what is the answer?

    Pipruit: 25 bucks minimum.
    Commander in Pips: Interesting decision, and where did you get it?

    Pipruit: Well, I ran through some brokers’ conditions and many of them allow you to open an account with just 25 bucks.
    Commander in Pips: Very interesting. I can say that with such approach you will need 2-3 new accounts every day…

    Pipruit: Why?
    Commander in Pips: Let’s see. As you remember we’ve discussed such thing as “volatility”. So, the minimum historical annual volatility is 5.5%, hence daily volatility approximately 5.5/(250)^0.5 = 0.7%

    Let’s suppose that current EUR/USD rate is 1.3480. Then we might say that with 99% probability rate will hold in the range (1.3480 - 1.3480*0.7%*3) – (1.3480+1.3480*0.7*3%) or 1.3763 – 1.3197, so your drawdown on position will not exceed 280 pips (since we need only a negative one). Ok, with 95% probability it will not exceed even 190 pips per day. Is it too much or too few?

    Pipruit: Hm, 180 pips risk a day at minimum seems rather solid to me.
    Commander in Pips: Ok, you can trade as small as 0.01 lot. This is 1000 bucks. What is your risk, based on our calculations?

    Pipruit: 1000*0.0188 = 18.8 bucks with 95% probability and 28 bucks with 99% probability…
    Commander in Pips: …per day

    Pipruit: Wait a minute, and how I can trade with just 25 bucks?
    Commander in Pips: If you start with $25, you will trade fast and shortly. This is the same as just give money to your broker for free, but here you will have all the preliminary hard work also to analyze the market - how is better to lose your 25 bucks…

    Pipruit: So, what I have to do?​
     
    #1 Sive Morten, Dec 28, 2013
    Lasted edited by : Oct 9, 2016
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