Profit Drain: The Real Cost of Ignoring Risk Calculation

There is one major attribute that is detrimental to your knowledge when it comes to investing. It’s either you know how to do it or you don’t. And if you don’t, I’m afraid to tell you that you will never make money in markets if you don’t understand the exact way on how you calculate your risk. In this video, I’m going to show you exactly how to calculate risk. Without further ado, let’s get straight to it.

Welcome back! If you’re new to the channel, my name is Matt Jimenez. I’m an entrepreneur who has worked with the greatest minds in finance over the last several years. I’m here to pour into you guys everything that they poured into me. And this video is solely for the person who is looking to maximize their potential profitability in the future when it comes to investing. Maybe you’re an active investor or maybe you are just getting started. Regardless, this is something that you need to understand because if you don’t, the likelihood of you ever making money in markets is 100% unlikely.

Now, there’s multitudes of markets, we know this, and all of them calculate the measurements in the market differently. For instance, when you look at stocks, each increment that the market moves, they consider it a point. Two points to the upside, two points to the downside, and that is the lingo. Now, when it comes to Foreign Exchange markets, they use the terminology Pips. And the word pip stands for percentage in points. Pip is the smallest whole unit price move that an exchange rate can use based on Forex Market convention.

Before I get into teaching you exactly how to calculate a specific trade and how much risk you would be taking on if you take a particular trade, you need to first understand Pips. So this is a brief understanding when it comes to Pips and position sizing. There is lingo around it and the lingo that you need to understand is mini lots, micro lots, and standard Lots. Now what is a lot? A lot is simply the unit measuring the transaction amount. Now that you understand that, let’s get straight to understanding how we can calculate mini, micro, and standard Lots because all of them are valued differently. Micro and mini obviously being the lower end of measurements of units and then standard lot being the greatest measurement of units.

A micro lot manages 1,000 units, and the way that it looks like on the platforms that you’ll be using to input trades would be a decimal number number, and that right there would be your micro lot. The farthest to the right of the decimal point is your micro, that is valued at 1,000 units, and what it translates in dollars terms is 10 cents all the way up to 90 cents. So if you have 0.09, that means every single movement the market makes, it is worth 90.

Now, if we bump ourselves up to a mini lot, that would be 0.10 and the number can go from 1 to 9, and that is valued at $1 to $9 per movement. This manages 10,000 units. And then the largest position size that you can take on is a standard lot. A standard lot is 1.0. Anything to the left of the decimal is a standard lot position and this is the highest position sizing you can go to. This is from $10 upward, depending on the leverage that your broker offers you. You can imagine how big you put that number, how much money you can potentially make and or lose. Most likely that would be the case.

Now, don’t get too confused with the units and how much it’s managing. All you really need to understand, which helped me, is micro lots manage 10 cents to 90, mini lots manage $1 to $9, and standard lots measure $10 onward for every movement. Now that you understand that, let’s get into exactly how you would calculate any given trade so you know how much you’re potentially risking for the trade.

Okay, so here we are on EUR/USD. The reason why I have this up is because I want to show you guys exactly how to calculate risk for any given trade, like I said. Let me just zoom in here. This here is our position sizing. This allows us to have a very simple illustration of how the trade is set up here. So in the middle right here is where our entry would be, and then to the far end of the green would be our take profit when the trade would close itself out and you take your profits. And of course, on the opposite end of this, you have the stop-loss. This is very important to understand because the way that you measure risk for any given trade is you need to find the difference between your entry and your stop loss because that is how much you are willing to risk.

And a lot of people don’t seem to actually grasp this. And in fact, I actually put a short position on this. I actually think this would be a good setup to have a short play out. But this video is not about trades. So now let’s find out how much risk would be on this trade. So the entry of this trade is the gray marker to the far right, which is 1.8555. That would be your entry. Now what you’re going to do is take your stop loss ’cause it’s the greater number and subtract that from your entry. And the difference in between is how much Pips you have at risk for this trade.

Now, what happens here is how many Pips you have varies on how much money is actually at risk. For instance, if your lot size is low and you only have a mini on there, then it would be a very different outcome if you lost this trade versus having a standard lot position on this. The amount of money in the loss is completely different but the amount of Pips in the loss is exactly the same. Now, let’s go ahead and calculate the difference between this. Now keep in mind, for EUR/USD and all Foreign Exchange pairs, the number to the far right is a pipette and that is even smaller in valuation than the micro lot.

And a pipette is basically 1 cent to 9 cents, so it manages the smallest measurement of the unit. Now back to finding exactly what this is, and the reason why I went over that is because when we subtract these, we are going to actually, for simplicity purposes, keep the pipette out. So, 1.865 minus 1.855 equals 10 Pips. So from our entry to our stop loss is 10 Pips. Now, the valuation of those 10 Pips is solely dependent on your lot size.

One thing you also need to keep in mind is the spread. So every single trade that you take for entering the trade, you actually have a spread and that spread is the commissions that go to the broker. And there’s nothing you could do about that, that’s why whenever you enter a trade, it starts off immediately negative because you paid the spread right up front. Now, let’s say you have a $10,000 account and you want to risk 10%, which is $1,000 of risk. So if you were to take this trade with a $10,000 account and there’s a 10 pip stop loss, you need to position the lot sizing to make that make sense. Now, 10% of risk is quite high for any given trade but for simplicity purposes let’s just use that. So, $11,000 at risk with a $10,000 account, you would need a lot size of 1.0 because we would need a 10 standard. That means $100 per increment that the chart moves and this is excluding whatever the spread is.

So whenever you’re doing position sizes on a particular trade make sure that you add whatever it is that the broker is charging. Typically a spread will run from one pip all the way up to 10 Pips or maybe even more, it fluctuates. It’s never a consistent number, it’s always fluctuating. So if this spread was five Pips instead of it being a 10 pip stop loss in my head, I’m going to make it a 15 pip stop-loss so I could adjust the risk accordingly and this is exactly how you need to calculate risk for any given trade and make sure that it goes within your parameters of risk for your account size.

And this is important to understand even when you’re using algorithmic trading software, because you are in control of how much risk you want to take because you can adjust the position sizing, meaning the lot sizing. So now that you can understand what 1.0 is: that’s $10 per pip; or what 0.10 is: $1 per pip; and so forth, now you can actively adjust those numbers and know what the valuation of the lot sizes are. This will help you make better decisions when you’re changing your lot size, because if you’re just changing your lot size without understanding how much more you are taking on per increment that the market moves you will easily and quickly find yourself in an over-leveraged position that could potentially go against you. This goes for manual trading and for software traders. It doesn’t matter if you don’t understand lot sizes you will lose if you’re interested in using software to trade for you and help you get the edge against the market. The one that I use is in a link down below and it’s for you to click if you click it you’ll be routed to the team you’ll get to see if this is a good fit for you; if not and you just found value in this video please leave me a thumbs up and or subscribe. It means the world and it makes me want to do this more than I already want to.

Like always my friends peace.

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