Grid Trend Multiplier Forex lot sizing and grid sizing essentials

INTRODUCTION TO GRID TREND RISK MANAGEMENT

In order for you to trade the Grid Trend technique in a competent manner you need to have a plan for when things do not quite work out. You can then implement your disaster plan without the emotions, panic and second guessing what to do.

There are 3 main disaster levels you need to plan for:

When there appears to be trend change.
When the maximum open trades are reached – ignoring closed trades.
When your currency reaches your maximum stop per currency – could include closed trades.

Let’s start with the easiest on first.

Point 3. When your currency reaches your maximum stop per currency.

.

YOUR ACCOUNT RISK

There are many ways to decide on a stop when trading Grid Trend system. What we recommend is to define the stop as a percentage of your account balance. So if you have an account of say $10,000 and want to limit your risk to say 5% per currency then your stop for say the EURUSD will be when the ALL transaction for the EURUSD reach -$500. This would include only open transactions and/or if you like you can also include closed transactions. So you would simply close all transaction when the total of transactions reach -$500.

This is a simple method of limiting your risk.

Strangely, this is the starting point of all your major Grid Trend Trading Grid size and lot size calculations.

So in the above example you would risk 5% of your $10,000 account on the EURUSD Grid trend trades – $500.

Using the following information:

$500 represents 500 – $1 (0.1 account) pips or 5000 – 10c (0.01 account) pips.
You need at least 10 open trades to give the Magic Multiplier a chance of success.
And, if your remember from the currency selection discussion, the EURUSD has a wavesize of +/- 600 pips.

We can now calculate the grid and lot sizing.

.

GRID SIZE CALCULATION

So if we need to cover 700 pips (added some safety margin to the 600 wave size) with 10 open trades then the Grid size should be 700/10 = 70 pips. Remember this calculation is for continuous trading and not for day trading.

.

FOREX LOT SIZING CALCULATION

So if we need 10 – 70 pip gaps to cover 700 pips then the open trade loss at level 10 will be 70 + 140 + 210 + 280 + 350 + 420 + 490 + 560 + 630 + 700 = 3850 pips.

From a Forex lot sizing perspective that means we can only trade 0.01 lots per trade for the EURUSD. 3850 pips x 10c = $385.00 which is below the $500 we are allowed to trade. If we trades 0.02 lots per trade we could have a loss of 3850 x 20c = $770 which is above the 5% we want to risk.

ANOTHER EXAMPLE

Now if we used the EURCHF which has a 200 wave size (250 pips for safety) we would have a grid size of 25 pips (250 pips divide by 10). This means that the open trade loss at level 10 will be 25 + 50 + 75 + 100 + 125 + 150 + 175 + 200 + 225 + 250 = 1375 pips.

From a lot sizing perspective that means we can only trade 0.03 lots per trade for the EURCHF. 1375 pips x 10c x 3 = $412.50 which is below the $500 we are allowed to trade. If we trades 0.04 lots per trade we could have a loss of 1375 x 40c = $530 which is above the 5% we want to risk.

.

A LIVE EXAMPLE

We are currently trading a $42,500 live account. He is using 0.04 lots per trade. His grid sizing is an average of 40 pips.

Can you calculate his risk per currency on his account?

A 40 pips gap gives 40 +80 + 120 + 160 + 200 + 240 +280 + 320 + 360 + 400 = 2200 pips 10 level risk

He is trading 0.04 so 2200 x 4 x 10c = $ 880 risk per currency

$ 880 as a percentage of $ 42 500 = 1.97% per currency

CALCULATING YOU RISK RETURN RATIO

In the above EURUSD calculation the risk was calculated to be 3850 pips for 10 gaps. If you are making 70 pips per transaction this means that you need to cash in 3850 divided by 70 = 55 times to cover your loss. This may seem like a very poor risk reward ratio but remember there are other risk management techniques which will be discussed in future modules.

IMPROVEMENTS TO THE GRID TREND TECHNIQUE

We are testing an improvement to the grid trend EA which will change the above calculations in a very favourable way. The improvement we are testing is that you will be able to increase the grid sizes after a number of open trades. So in the above EURUSD example where the wave size was 700 pips. Increasing grid sizes after 3 open trades and 50% increase would be give you grid gaps of 70, 70, 70, 105, 157, 236 to cover the 700 wave. only 10 Grid levels and the loss would be 700 + 630 + 560 + 455 + 298 + 228 = 2871. This is 979 pips less than in the above example.

We hope you are getting an idea of how lot sizing, grid sizing is used to manage risk on your account. It is vital to do these calculations BEFORE you start trading. If you can not accommodate trades at the minimum 0.01 lots don’t trade or find currencies that will allow you to trade. Please bear in mind that the above calculations apply mostly to continuously traded Grid Trend trades

Managing risk when day trading and the other risk management techniques will be covered in future modules.