Before we get into today’s article, let’s discuss the angle. This article is meant for shorter-term term traders who generally only take 1-3 positions at a time. Thus, it does not apply to forex 5 pips per trade stock portfolios or hedge funds with many different assets under management for very long periods of time.
Not everyone will agree with the concepts I discuss in this article, but this is how I track trading performance and how many other successful retail and prop traders track their performance. Most forums and blogs discuss percentage and pip returns on traders’ accounts. Every trader is different, and every trader brings with them a different set of mental variables and funds to trade with. Since this is the case, you should track your performance in terms of dollars risked vs. I define it, is a value that reflects the profit factor of a fixed risk Forex money management strategy.
Thus, R is a measure of your overall risk to reward across all your trades, by knowing what our R value is for a series of trades we get a very quick and relevant view of our effectiveness as a trader. The percent risk model deserves some special attention since it is probably the most popular risk-management model out there. I won’t go into a long drawn-out analysis of this because I have already written an article that you can read on this Forex trading money management topic. 1 or 2 positions at a time, this percent risk rule is simply not the best way to manage your trading account. Are you starting to see why percentage-based returns are not nearly as relevant as dollar-based returns?
It’s important to note that a trader doesn’t have to have a lot of money in their account to trade a large position size. 50,000 in my trading account, because I simply don’t need more money than that in my account due to leverage. So, the reason why account balances aren’t really a good baseline to determine your risk per trade from is because you can control a large position size with a relatively small deposit of money, so you simply don’t need to and shouldn’t keep all your trading funds in your trading account. A trader who is a millionaire does not want or need all their trading money in their trading account. As we alluded to previously, due to leverage, you can control a large amount of money with a small amount.