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Home / Trading Strategies / Trend Following Strategies / A Risk Management Example

A Risk Management Example

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Note: this article focus on a risk management example , it’s supplement of forex trading strategies guide, not a complete strategy, please do not trade directly only according to this.

 

Time frame: H4 chart

Currency pairs: All

Long position entry rule:

In most case 3 continuous candlesticks closed above MA120.

risk-management-example-MA120-entry
Long position exit rule:

3 continuous candlesticks closed below MA120

risk-management-example-MA120-exit

Risk management:

Take AUDUSD as an example.

Initial stop loss: 100 pips (Four decimal platforms)

Initial position sizing: P=( capital*0.5%)/(100*10)

Add position:

1. Each add position size equals to the initial position size.

2. Add a position every 50pips(half of initial stop loss) moving-up, and for 3 times at most. Assume the initial position called 1, then the later added position called 2,3 and 4. Each time a new position added, the stop loss of previous position moves up 50 pips. But once the stop loss move to its corresponding entry price, then it will not be moved any more.

risk-management-example-add-position
3. Re-entry

In some case re-entry steps needed.

See the chart below. Assume there are position 1 and 2. For position 1, its original stop loss 1 as the chart shows. When position 2 appeared, the original stop loss 1 moved, and became the moved stop loss 1, it was the same with stop loss 2(the original stop loss of position 2). Later the price rebounded and hit the stop loss 2, both position 1 and 2 exited.
The price dropped again, when it was 50 pips lower than position 2(the latest position) as the chart shows, it’s time to re-enter. In fact, the re-entry price is the originally planned position 3 entry price.

risk-management-example-re-entry

The current high(low) price location determines where to re-enter. See the below table, the position 5 and 6 are nonexistent in real trading, here just to explain how the re-entry works. The above chart also meets this rule, the current low price located between position 2 and 3, so the position 3 entry price is the re-entry price.

The main idea is that the re-entry price should be higher than before high price to confirm the trend.

risk-management-example-re-entry-table

Note:

1. Must trade at least several market at the same time.

2. Limit the total risk including but not limited to total position numbers, related market position numbers..

3. Reduce sizing when suffer losses. For example, a $10000 account. If there are 10% losses, that is to say only $9000 left, then trade with 9000*80%=$7200 next time. If there are another 10% losses, it means only (9000-7200*10%)=$8280 left, then trade with 8280*80%=$6624.

 

 

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