NoaFX Tutorial

3.3 Calculating Risk Exposure per trade

What is Risk Exposure?

It defines the amount of capital you are risking at any situation, defined by percentage, based on your overall available capital.

Why do I have to know this?

It is very important to expose your account to small, sizeable risks at any one time. The % exposure of your account to each trade can be derived by considering;

  • Your Risk Tolerance level
  • Your Profit taking appetite
  • The quality of your system
  • Money making goals based on all of the above.

It is very common and very disheartening that many traders come into Forex trading and start trading the market without having knowledge about any of the above.

Before they even realize what has happened, they will have lost all, if not most, of their money.

Therefore, it is very important that you understand these factors and define your trading rules on risk management properly.

To further understand the importance of risk management, let us look at 2 examples.

As you can quite easily tell, the example on the left exercised strong risk management rules, and by not risking anything more than 2% per trade, the trader is left with $13,903 of a $20,000 account after 19 losing trades. It is possible to make profits of about 50% to recover your losses after this losing streak.

On the other hand, the example on the right, risked 10% per trade and after the same run of 19 losing trades, the trader is only left with $300. What is the Return on Investment (ROI) required to turn $300 to $20,000, to just recover the losses?

Calculating Risk Exposure per Trade

It is therefore very important to calculate how much risk you are exposing yourself to, each time you open a position.

In order to compute this, we need;

  • Price of Currency Pair
  • Volume or Size of Contract (Lot Size)
  • Leverage facilitated by broker
  • Your available capital (realized profits and losses)

In our example, let us assume that;

  • Price of Currency Pair = 1.5000
  • Volume or Size of Contract = 100k or 1 Standard Lot
  • Leverage = 1:200
  • Capital = $20,000

Risk Exposure per trade = Cost of Currency Pair X Lot Size / Leverage / Overall capital x 100

Therefore, = 1.5000 x 100,000 / 200 / 20,000 x 100

= 3.75%

Therefore, you can tell that you have to risk 3.75% of your capital to acquire a 1 Standard lot contract. As a rule of thumb, we will not expose our positions to more than 2% of risk at any one trade. Hence, with the current situation, you shall consider reducing your lots size to accommodate a 2% risk exposure limit.