Risk Management – An Overview
The objective of the T4T Practical Assessment is to assess if you are able to adhere to our rules for trading our live accounts. The rules are simple and the limits are in place to not only protect our capital but also to protect your profits.
Please do not request exclusion from any of these rules. They are there for both our benefit.
Risk Management Limits
|Assessment Account Size||Weekly Loss Limit||Maximum Drawdown Limit|
The limits are in place to protect our capital and to protect your profits from the week before. This stops you risking all your profits should you have a bad week. These are hard and fast account/equity balance levels that cannot be broken.
If you Breach any Limits your account will require a reset to continue with the opportunity to become a funded trader with T4TCapital.
The Weekly Loss Limit Level
The Weekly Loss Limit Level is calculated using the Weekly Start Balance and subtracting 2% of the Account Start Balance from the Weekly Start Balance. This provides you with a static equity balance for the week that you cannot go below.
Lets take a look at a $100,000 trading account.
Starting Weekly Account Balance: $100,000
Available Risk: 2% of $100,000 = $2,000
Weekly Loss Limit: Starting Weekly Account Balance – Available Risk = $98,000 (you cannot go below this during the week)
Lets say you get off to a great start and make $2,000 by Wednesday, your Available Risk to trade has now increased
Account Balance = $102,000
Available Risk = $102,000- $98,000 = $4,000
Starting Weekly Account Balance: $102,000
Available Risk: 2% of $100,000 = $2,000
Weekly Loss Limit: Starting Weekly Account Balance – Available Risk = $100,000 (you cannot go below this during the week)
As you can see the Weekly Loss Limit Level is recalculated at the beginning of each week to protect your profits from the previous week.
The Maximum Drawdown Level
The is the safety net for our Capital. It is calculated by taking 4% of the starting account size, in this case $100,000 and subtracting the 4% or $4,000 to obtain a Maximum Drawdown Level of $96,000.
Should you make a profit during the first week the $4,000 trails (your highest account balance) just like a trailing stop on a trade until the level hits the account start balance, where it then remains static at that level for the life of the account.
For example, if you reach an account balance of $104,000 the Max Drawdown becomes $100,000 at this point it never moves. If you then increased your account balance to $106,000 the Max Drawdown remains static at $100,000.
Account Management Rules
The rules cover all account sizes and are industry standard rules. When we mean industry standard we mean professional trading rules employed by the financial institutions such as the banks, hedge funds and mutual funds. These account management rules are managed by our trading server at T4TCapital.
If you Breach one of these Rules, your account will not require a reset, instead the trade that you placed that breaches a rule will be automatically closed at market. You will more than likely incur a small loss due to transaction fees. Think of it as a penalty for breaking the rules!
Rule 1 – A Valid Stop Loss Must Be Attached to Every Trade When it is Opened
- You cannot open a position and then add a stop loss afterwards. The stop loss must be a pending order attached the entry position.
- To be VALID your Stop Loss must be within your available limits. If your Weekly Loss Limit is $2,000, you cannot open a position with a Stop Loss that if triggered the loss will exceed $2,000.
You can use any trading methodology you wish and you can even use robots or EA’s however you are responsible for ensuring they have a Valid Stop Loss attached when the position is opened.
Rule 2 – All Trades Will be Closed Automatically by T4TCapital on Friday @7PM GMT.
This is a very basic rule. All trades either open or pending will be closed automatically by T4TCapital on Friday at 7PM GMT.
Over the last few years with the numerous geopolitical issues, gapping on the Monday open has been commonplace. It is an unnecessary risk to have trades open over the weekend when the market is closed.
If you want a long term trade then simply exit the trade on Friday and enter back into the trade on Monday at the same (or close ) to the same price.
Open positions over the weekend when the market is closed is huge and unacceptable risk for T4TCapital.
Rule 3 – Maximum Position Size
Your Maximum Position Size is controlled by the leveraging settings of our accounts (1:10 leverage). So, if MT4 allows you to place the trade, you can do it!
In all our trading accounts, whether it be a Practical Assessment or a Live Funded Account, the account balance is leveraged at a ratio of 10:1. This simply means that for every $10,000 USD in your trading account, you can trade $100,000 USD or 1 standard lot.
As the account balance grows so too does your trade size. Likewise, if you lose money your available trade size will decrease. This rewards good trading and enables our traders to expand their trading activities as their accounts grow.
The position size of different symbols will vary significantly according to the margin requirements, pip value and spread of the symbols. For Forex there will be subtle variations but for the CFD’s there will be much larger variations. Regardless of the variations and maximum position size, you will still have the same level of risk on regardless if your maximum trade size is 10 lots or 1 lot.
For Example: $100K Account Balance
The maximum position size for the following instruments would be:
EURUSD = 8.5 lots
GBPUSD = 7.75 lots
AUDUSD = 14.0 lots
USDCAD = 13.5 lots
USDINDEXZ0 = 2.0 lots
EU50Roll = 200 lots
UKOILZ0 = 3.0 lots
VIXV0 = 1.0 lot
Note: The maximum position size will vary with fluctuations in the symbols exchange rate. For example, as EURUSD falls the trade size will increase and vice versa.
Understanding Leverage & Margin
There are two factors that determine your available trade size:
What is the Margin?
Margin is the amount of money needed as a ‘deposit’ to open a position with your broker. It is used by your broker to maintain your position. Your broker basically needs your margin deposit to be able to place trades within the interbank network.
Margin is usually expressed as a percentage of the full amount of the position. For example, most forex brokers say they require 2%, 1%, 0.5% or 0.25% margin.
It is important to note, different instruments have different margin requirements due to their volatility & liquidity characteristics as well as their pip value per contract size (1 lot).
Based on the margin required by your broker, you can calculate the maximum leverage you can wield with your trading account.
What is Leverage?
Leverage is the use of borrowed money (called capital) to increase the trade size and hence potential return of an investment.
Put simply, leverage gives traders the ability to trade larger positions in a currency or financial instrument.
Rule 4 – Your Open Risk Must Not Exceed Your Available Drawdown Limit
Trading forex for longevity means managing your risk efficiently and effectively. The risk you enter into the market is critical to your success. Your Open Risk (OR) in the market must never exceed your Available Drawdown Limit (ADL). If it does, your most recent trade will be closed to bring your account within the Available Limits.
When you open a position in the market, you attach a stop loss to the trade. Convert the amount of pips of the stop loss from your entry level into a USD$ value and that is the risk for that trade. If however, you have another trade open in the market it is the combined risk that is your Open Risk in the market. Remember, a pending trade can trigger at anytime and will impact your Open Risk. So, if you have pending orders in the market, make sure the risk on these orders does not exceed your Available Drawdown Limit.
Calculating Your Open Risk is Simple
Stop Loss Risk Totals in Open Trades = Total Risk in the Market = Open Risk
Available Drawdown Limit
Your Available Drawdown Limit (ADL) is the maximum amount in dollars you have available to risk on your trades. It is the difference between your current MT4 account Balance or Equity and the nearest Drawdown limit (which may be either the Weekly Loss limit or the Maximum Drawdown Limit).
Take a look at the chart below.
This is the start of the week of a $100,000 account, the Weekly Loss Limit Level of $98,000 is the limiting factor (Max Drawdown Level is at $96,000). The account balance is $100,000 so the Available Risk is $2,000.
We had a great start to the week reaching a High Water Mark during the week of $104,000 which dragged the Max Drawdown up to $100,000. Notice this happened on the Thursday so the limiting factor is now the Max Drawdown Limit as it has overtaken the Weekly Loss Limit level.
Note on Thursday the Available Risk was $4,000 and it looks like the trader was likely taking too much of that risk available and lost a few trades. The traders Available Risk on Friday at Point B becomes $2,500.
Last week The Maximum Drawdown Level rose to $100,000 this now remains static for the life of the account, it will never rise any further from that level. So, now the only Limit you have to consider is the Weekly Loss Limit for the rest of the account life. So you can see if you build a buffer of $4,000 profit or 4% then the sky is the limit and you are only limited by the Weekly Loss Limit Level.
The Weekly Loss Limit Level for this week is now a static $101,000.
Again the account has a stellar week with the Weekly Loss Limit Level following at $104,500, protecting those profits form the previous week. A little over zealous with a loss of $1,500 on the Friday (never a good trading day) leaves the Weekly Loss Limit Level starting Week 5 at $106,000. The trader appeared to be rushing to the finish target profit of $110,000.