In a recent Forex article, Nial Fuller discusses his take on Forex money management and the proper way to measure trading performance. This article is controversial to some because Nial goes against the grain of what most people in the Forex industry say you should do to manage your account; calculate risk in percentage or pips. Nial’s take is to measure risk in dollar terms, and also reward. The article he wrote on forex money management talks about the number “R” and how this number shows the overall risk / reward of your trading account over a series of trades.
Using the number “R” gives you a quick view of your effectiveness at managing risk and obtaining reward. Most traders do not calculate risk and reward in dollar terms, but rather than calculate risk in percentage terms or pips, this is simply the wrong way to do it according to nial fuller. Nial’s article discusses how traders with different account sizes can trade similar position sizes due to leverage and also how the skill of a trader plays a role in individual risk tolerance, therefore, traders are better off using the dollar risk model to manage their accounts rather than percents or pips. Large hedge funds with many assets under management or diversified stock accounts are more likely to use the percent risk model since they have many positions open at one time, but for the smaller short-term trader, how only has 1-3 positions at a time, it makes more sense to manage risk in dollar terms.
