Agenda
• Leveraged products on SaxoTrader • Example of the benefits of leverage
Risk Management • Example of excessive risk taking
• Risk Management – our suggestions
Leveraged products on SaxoTrader Forex
leverage as high as 1:100
CFDs
leverage as high as 1:40
Futures
variable leverage available
Physical Stocks
no leverage available
Agenda
• Leveraged products on SaxoTrader • Example of the benefits of leverage • Example of excessive risk taking • Risk Management – our suggestions
Example of the benefits of leverage: Mr. Jones has an account with a balance of 50.000 EUR He goes long 1.000.000 EURUSD at 1,2600, margin required: 10.000 EUR He closes the position at 1,2700 for a 100 pips profit His profit: 1.000.000 X 0,0100 = 10.000 USD (= 7870 EUR) Return on investment: 78,7% (he invested 10.000 EUR) New balance: 57.870 EUR - an increase of 15,7%
Agenda
• Leveraged products on SaxoTrader • Example of the benefits of leverage • Example of excessive risk taking • Risk Management – our suggestions
Example of excessive risk taking Mr. Jones has 57.870 EUR and places his second trade: He goes long 2.000.000 EURUSD, but loses 200 pips His margin utilization goes to 76%. He decides to take his loss Loss: 40.000 USD ( = 31.500 EUR) New account balance: 26.370 EUR (a decrease of 54,4%)
Agenda
• Leveraged products on SaxoTrader • Example of the benefit of leverage • Example of excessive risk taking • Risk Management – our suggestions
Good risk management principles • • • • • •
The 2% rule Correct position sizing Positive stop loss/take profit ratio Position structuring Daily/weekly/monthly loss limits How to find a perfect balance in number of trades
Example of the 2% rule: Mr. Jones has 50.000 EUR on the account: He goes long 2.000.000 EURUSD, and the market goes against him When has he lost 1000 EUR? 1.000.000 X 0,0006 = 1200 USD (apprx. = 1000 EUR) Maximum affordable adverse market move: 6 pips! (Probably the position is too big for his account size!)
Good risk management principles • • • • • •
The 2% rule Correct position sizing Positive stop loss/take profit ratio Position structuring Daily/weekly/monthly loss limits How to find a perfect balance in number of trades
Example of correct position sizing Mr. Jones has 50.000 EUR on the account: He goes long 250.000 EURUSD, and the market goes against him When has he lost 1000 EUR? 250.000 X 0,0050 = 1250 USD (apprx. = 1000 EUR) Maximum affordable adverse market move: 50 pips! Probably 250.000 is a more reasonable position size for Mr. Jones
Good risk management principles • • • • • •
The 2% rule Correct position sizing Positive stop loss/take profit ratio Position structuring Daily/weekly/monthly loss limits How to find a perfect balance in number of trades
Positive take profit/stop loss ratio Mr. Jones enters a long position in EURUSD at 1,2600 He places a limit order to take profit at 1,2650 (= 50 pips profit) Where should his stop loss be? No further away than 1,2575 (= 25 pips loss) Why? To ensure a positive take profit/stop loss ratio
Good risk management principles • • • • • •
The 2% rule Correct position sizing Positive stop loss/take profit ratio Position structuring Daily/weekly/monthly loss limits How to find a perfect balance in number of trades
Position structuring Mr. Jones enters a long position of 200.000 EURUSD at 1,2600 He places a limit order to take profit at 1,2650 (= 50 pips profit) – but only for 100.000 EURUSD He places another limit order to take profit at 1,2675 (= 75 pips profit) – for 50.000 EURUSD He decides to let the last 50.000 run to potentially catch the whole move He moves stop loss to entry as soon as he takes the first profit
Good risk management principles • • • • • •
The 2% rule Correct position sizing Positive stop loss/take profit ratio Position structuring Daily/weekly/monthly loss limits How to find a perfect balance in number of trades
Daily/weekly/monthly loss limits Mr. Jones looks at his performance over the last month: On his average winning day he makes 50 pips Mr. Jones also found out that on an average losing day he loses 75 pips He should stop trading whenever he has lost 50 pips in one day Why? To ensure that a ”bad” trading day wouldn’t wipe out all of his profits And To ensure a ”healthy” balance of an average gains vs. average loses
Good risk management principles • • • • • •
The 2% rule Correct position sizing Daily/Weekly/Monthly loss limit Position structuring Daily/weekly/monthly loss limits How to find a perfect balance in number of trades
A balanced number of trades OVERTRADERS
UNDERTRADERS
Don’t know when to stop
Obey the 2% rule...
Make great profits – but can lose them the same day!
...but stop trading as soon as they have a small profit!
They try to squeeze every pip out of the market leading to exhaustion and losses as a consequence
They miss further trading signals leading to very few profitable trades and a lot of regrets about missed opportunities
A balanced number of trades OVERTRADERS
UNDERTRADERS
Both should set a daily profit target An overtrader should stop trading once it has been reached An undertrader should keep trading until it has been reached Both should stop trading if the daily loss limit is reached