Trade on Track has some built-in features which help you monitor and manage forex risk. The Current Risk Summary table at the bottom of the Trade on Track page is a summary of your risks in your currently open trades.
Traders have different ways of managing their forex risk. As a minimum, you should have a rule that you don’t risk more than a specific percentage of your account balance on any one trade.
The way risk is calculated on a trade-by-trade basis, is by determining the difference between the trade entry price and the stop loss point, then working out how much you would lose if you were stopped out. The risk percentage is then the amount you could potentially lose, multiplied by 100, divided by your account balance.
This is the calculation done (and displayed) every time you enter or adjust a trade within Trade on Track. A similar calculation is done for “reward”, based on your target points(s) instead of your stop loss point, so you can easily determine your risk/reward ratio.
So, that’s the risk calculation on a trade by trade basis. From that, you can easily determine a Total Risk (just by adding the percentage risk for each of your open trades), and also an Average Risk per trade (by taking the total percentage risk and dividing it by the number of open trades).
So far we’ve accounted for the first two boxes in the Current Risk Summary table. The next two boxes are risk calculations broken down to individual currencies. The first box displays the “total risk” per currency, the next box displays the “hedged risk” per currency. An example will help to make things clearer:
Imagine we have 3 open trades at the moment, as follows:
Our risk/reward calculations for each of these three is as follows:
Notice that on our first two trades, it’s a BUY (so, a SELL against the USD). On the third trade, it’s a SELL (so, a BUY against the USD).
Using this information, we can isolate each of the different currencies that are involved in our trades. Those currencies are the EUR, GBP, AUD, and USD. We can get a “total” risk per currency by just taking the individual risk in each of the related trades, and adding them up. So, the “EUR” is only involved in one trade, so the total there is easy. Same with the “GBP” and “AUD”. The “USD” is involved in all the trades, so we would add up the risk in each of the trades to get a total forex risk for the US dollar.
Here’s what our forex risk summary table would look like:
So, we’ve worked out how to calculate a Total risk per currency. The last box in our summary table is Hedged risk. To calculate hedged risk, we look at the direction of each of our trades, and if we’re trading the one currency in different directions, then we’re effectively hedging that currency. To calculate the hedged risk, we basically subtract one risk from the other (or apply positive and negative signs based on the direction of the trade: buy or sell).
Hedged risk is probably a more accurate calculation of risk across all trades, but for the conservative trader: it’s better to work off total risk per currency across all trades.
To learn more about Forex Risk and how to simply and accelerate the level of your trading, visit Trade on Track.
Good luck and Trade Seriously!