Advisor Trading Risk Management
Tired of it. How much can people? You read comments on forex advisor reviews and you wonder how well WHY DO PEOPLE LIKE DRAWING DEPOSITS SO? And every time the same thing: “I put the robot, he earned / lost 30% in a day”. Well can't adviser (if it’s not about martingale) lose 30% in a day if you have adequate risks.
People either specifically make casino out of forex, or they are just dumb, I don’t know. But the FULL UNDERSTANDING of how the lot size is set in the trading experts is on the face. I have a weak but hope that this video tutorial will help to at least slightly reduce the number of lost deposits due to an incorrectly set lot. Yes, today we’ll talk about money management when working with Forex advisors.
- Video course "Forex on Autopilot"
- Rules for working with dangerous advisers
- My trading lot calculation method
Unfortunately, a robot is not some kind of magical machine, not a higher mind, which knows exactly where the market will go in two minutes. Advisor is just a set of algorithms with hard-coded ways to solve a specific problem. That is, if x = 5y, then action z is performed, if x = 4y, then action n is performed, and so on.
Of course, the adviser will not save you from losing trades, no matter how thoughtful and correctly written it may be. Here everything is the same as in manual trading. And although we know in advance that there will be unprofitable transactions, the calculation is that the number of profitable ones will prevail. Accordingly, we need to calculate the trading lot in such a way that in case of losses, which cannot be completely avoided, we stay afloat and can continue to trade. That is, if the adviser started trading at a loss, you need to wait for profitable transactions, block a series of losses and continue to trade further at the same pace.
However, many traders absolutely do not understand the value of a trading lot, how to set it correctly, and why it is impossible to risk the entire deposit in one transaction. So, if you are going to play all-in, that is, when one transaction can either increase your deposit or completely destroy it, then you should at least be aware that in this case you can lose everything. However, many do not understand this, do not want to understand, or subconsciously perceive trade as a game of chance.
Types of MM in trading experts
There are 3 types of money management in advisors. Naturally, there are variations and there may be certain nuances from an adviser to an adviser. But, in general, from all methods of lot management, three main ones can be deduced:
- Automatic lot (percentage of the deposit) - as a rule, the percentage of the deposit that you lose if the stop loss is triggered is set, based on which, in fact, the adviser calculates the size of your transaction. Let's say you set 1% of the deposit. Then, if the deal closes in a stop, you will lose 1% of the total capital.
For an automatic lot, a risk of 1% to 5% per trade is recommended. In no case do you need to set 30% per transaction or more. If you accept this risk, you should understand that 3 unsuccessful transactions will almost completely destroy your deposit. In fact, even 5% is already a big risk, and it is better to stick to the values of 2-3%.
It is also worth avoiding ruble accounts. The fact is that many advisers do not know what rubles are and will consider that you have an account in dollars. Accordingly, you will open huge deals that do not match the real size of your deposit. For example, you put a 3% risk on a transaction, and in the end you lose half of the deposit. In general, the sense of using ruble accounts is practically absent. Therefore, use dollar bills and then all advisers, indicators and scripts will work most adequately.
- The size of the first order in a series of orders (used in advisers on the martingale, grid and others).
All advisers of this kind trade in different ways - somewhere the lot grows, somewhere it simply duplicates. Therefore, always follow the recommendations. On our website, in reviews of this or that robot, if it trades on a martingale or is a netter, the deposit size and the corresponding trading lot are always given.
For example, we have 0.01 lots per 2000 deposit units, what does this mean? If you have a dollar account and the minimum lot in your account is 0.01, then you do not need to trade with $ 500 in the account, for this advisor it is almost a guaranteed drain. On a cent account, the same 2000 units of deposit is only $ 20, each person already has such an amount. That is, you do not need to open a dollar account if you are not able to put in the amount corresponding to the recommendations. And do not think, for example, that the adviser will earn a little bit and reach the recommended amount - you should not hope for luck. Recommendations are given for a reason, most likely, you just won’t survive the drawdown and the account will be closed by stop-out, when the account with the recommended deposit will survive it well and continue to grow.
- Fixed lot - a constant lot size, for example, 0.1, which remains fixed regardless of whether the adviser earns or not.
Everything is simple here. Suppose we use a fixed transaction size, set a lot of 0.1 and, regardless of how the deposit changes, what is its current size, the adviser will open transactions with a lot of 0.1. The main question is how to calculate the optimal lot size for an adviser. In fact, there is a simple way to calculate the optimal order volume using the strategy tester.
So, open the trading terminal and strategy tester. In the tester, we select an expert for whom we are going to calculate the optimal trading lot. If the adviser has automatic money management, turn it off, and set lot 0.1. It happens that in advisers there is no such function as automatic MM. In this case, this lesson will be useful to you for calculating the optimal lot.
Next, we need to run an advisor on history with disabled management and a fixed lot of 0.1. Upon completion of the test, go directly to the report. Profit and loss indicators are not of interest to us; we are only interested in the drawdown size. Since we ran our EA with a constant lot of 0.1, we have the maximum drawdown in dollars, in fact, equal to the drawdown in points. So, we see that this EA has a maximum drawdown of 235 points.
Now, using this data, we can calculate the optimal deposit size. To begin with, we need to determine what size of drawdown we consider the maximum acceptable. Of course, you can say that, for example, I’ll survive the drawdown without problems and at 50-70%. But in reality, most often it turns out differently, and the level of drawdown, which is considered critical from a psychological point of view, is at around 25%. Therefore, 25% is the most optimal option for most traders. For someone, this value can be 10%.
Let's now assume that our 235 drawdown points is 25% of the deposit. That is, the maximum that we can allow in the form of drawdown. So, we need to multiply our drawdown of 235 points by the amount in dollars when using the minimum trading lot of 0.01. As we know, the minimum price movement in the old points when using 0.01 lot is 10 cents. We multiply 235 * 0.1, we get an amount approximately equal to $ 24. Thus, $ 24 is 25% of the deposit. To get 100%, just multiply $ 24 by 4, we get $ 96.
That is, if we want the drawdown to not exceed 25% of the deposit, then we should use lot 0.01 for every 96 $ of the deposit. Accordingly, if we have a deposit of $ 1000, then the working lot will be 1000/96 * 0.01 = 0.1 lots. As a result, we found out that if we want to use a fixed lot with a maximum allowable drawdown of 25% of the deposit, then we should use no more than 0.01 lots for every $ 96 of the deposit.
With the help of such simple calculations, you can calculate the correct size of a fixed lot for any advisor. In most cases, advisers have the function of automatic money management, and it will be enough for you to set the percentage of the deposit in the settings. It is advisable never to specify more than 5%, and it is best to stay 2-3%. Leave the adviser to trade, and he will already adjust the lot to the size of the deposit, along with its decrease or increase.