THE HAnDbook of TECHnICAl AnAlysIsHence, even if a balance curve indicates a rising balance, the actual equity
may be in great decline. Therefore, we should always study a system’s equity curve
rather than the balance curve, and apply the minimum initial capital rule accord-
ing to the volatility in the equity curve instead.
Some important questions a trader should ask before risking capital are:
■ (^) How much capital is appropriate for a particular trading system?
■ (^) How do we use the balance and equity curves to our advantage when integrat-
ing passive and dynamic strategies?
■ (^) How do we withdraw profit from the account safely without endangering our
ability to buffer future losses and survive as a trader over the longer term?
■ (^) How do we use margin, platform minimum trade size, tick values, and mini-
mum allowable stopsize to determine whether we are sufficiently capitalized
to trade a certain market?
■ (^) How do we use various broker facilities, including margin, to our advantage
so that we can trade more effectively?
reward‐to‐risk ratios
Let us now turn our attention to another passive component called the reward‐
to‐risk ratio, that is, R/r ratio (little r is used to denote risk). Assume that our
capital is $10,000 and that we intend to risk 1 percent per trade, that is, %risk =
1 percent. Therefore, our dollar risk, that is, $risk is simply:
$ =×=×=$ ,10 000 %risk $ ,10 000 1% $risk 100
Now, assume that we are trading the minilots on the EURUSD exchange rate
and that our stopsize is 100 pips. Our tradesize would therefore be:
Trade size risk stop size pip value
per pip
= ×
= ×
$ /( )
$ /( $100 100 1 ))
=1minilotSee Figure 28.17.figure 28.17 Reward and Risk.