Risk Strategies

Fixed StopLoss and Fixed Lot

Advantages

Using a fixed Stoploss Size and a Fixed Lot Size has the advantage that it is easy to implement when trading.   Also because the Lot Size stays fixed, the GAP Risk associated with trading remains consistent.

Disadvantages

As the same Stoploss Size is used when trading in volatile markets and quiet markets, this risk management strategy can have very little association with the recently observable market data.

Variable StopLoss and Fixed Lot

Advantages

Using a variable Stoploss Size and a Fixed Lot Size has the advantage that it is relatively easy to implement when trading.   Also because the Lot Size stays fixed, the GAP Risk associated with trading remains consistent.

Disadvantages

As the size of the Stoploss is changed during market conditions, but the Lot Size is not, the amount put at risk and hence the profit that I would expect to make will be strongly correlated with the volatility in the market.   In highly volatile markets I expect to make higher profits or greater losses than I would when trading in a quite market.

 

Variable StopLoss and Variable Lot

Advantages

Using a variable Stoploss Size and a Variable Lot Size has the advantage that the trade can be matched to the recent market conditions and the amount put at risk and hence the expected profit can remain fairly consistent from one trade to the next.   For example, if I have two trading opportunities, one that requires 50 points of risk and the other 100 points, then I could chose a Lot size that ensures that the maximum risk for both trades is roughly $100.

Disadvantages

To keep the amount put at risk consistent between trades the Lot Size must be increased as the size of the Stoploss decreases.   This means that trades with a very small Stoploss size are associated with a very high Lot Size and hence could be associated with a very high loss should a GAP event occur.

 

At present, I prefer using a Variable Stoploss and Variable Lot size, however I put a Cap on the Lot Size so that the GAP risk associated with any trade has an upper limit.