Risk management is the most important part of the Million Dollar Trading Challenge. Risk management is often overlooked by amateur traders. Ignoring risk management will only result in losses that could have been easily avoided. In the Million Dollar Trading Challenge, we will be looking for trades that have a reward to risk ratio of at least 2:1. Sometimes this reward to risk will be 5:1 and even 10:1. The stop loss most of the time will be 20-25 pips. In each trade, you should not risk more than 2% of your account equity. You will use this Risk Management Formula for calculating the lot size:
Risk=2*Account Equity/100
Lot Size= Risk/(10SL)
SL is the stop loss. This formula just needs 2 simple calculations. In the first step we calculate the Risk by multiplying the Account Equity with 2 and dividing the resulting number with 100. In the second step we calculate the Lot Size by dividing Risk with 10 times SL. Memorize the above 2 step simple formula. It would be a good idea to write it in a note book so that every time you get a signal, you can easily calculate the lot size.
Let’s make it clear with the help of an example. Suppose you are starting with $350. You get a signal with a stop loss of 20 pips. First we calculate the risk. Risk in this case will be 2 times 350 divided by 100 which is $7. Lot size is simply Risk divided by 10 times Stop Loss which is in this case 7/200=0.035. Lot Size can only be 2 decimal so disregard the 3rd decimal and you are going to enter into the trade with a lot size of 0.03.
Let’s take another example. Your account equity is $1500. You get a signal with stop loss of 25 pips this time. 2% risk means your Risk will be 2 times Account Equity divided by 100 which comes out to $30. So you are going to risk $30 on this trade. Lot Size will be Risk divided by 10 times Stop Loss which is 30/250=0.12 lots.
Now this was when you are manually entering into each trade. If you have subscribed to the Million Dollar Trading Challenge EA, the Slave EA will automatically copy all the trades so you don’t need to enter the trades manually. But you will still need to manage risk. In the case of Million Dollar Trading Challenge EA, you should do the following.
Daily check your account once when you have a little time. Use an average stop loss of 25 pips in the above formula to calculate the lot size depending upon the account equity for that day. Daily checking the account equity and how many trades were won and lost yesterday will be a good idea. Just update the lot size once daily with the above formula and you are all set for the rest of the day. Next day again check and update the lot size. This will hardly take 5 minutes of your time each day.
Please feel free to leave comments below this post if you have difficulty in calculating the Lot Size.