Markets can remain illogical longer than we can remain solvent. How much of a loss should be at risk on a trade depends a lot on what kind of trading you are doing. A day trader is likely to risk considerably less than a long-term position trader, but as a rule of thumb it is inadvisable to risk anything more than 5 percent of the total risk capital in your account on any individual trade. So if you have $10,000 in your account, risk no more than $500 on any individual trade. Remember, you are going to have a lot of losing trades!
You can calculatethe appropriate position size for a trade by dividing the dollar amount you are willing to lose by the number of pips to your stop loss. Don’t confuse your percent of equity loss tolerance with the margin requirement, though. They are unrelated.
Assume:
$500 loss tolerance EUR/USD 148-pip stop (1 percent) or .0148 based on 1.4800 spot price
Calculation:
$500 ÷ .0148 = EUR33,783 position (or EUR30,000 in round numbers)
Thus, if you are willing to risk $500 on a trade with a 148-pip stop, your position should be EUR30,000.
You can adjust your stop loss requirement and increase or decrease your leverage to arrive at a proper balance. The point is that you don’t want to blow your entire trading account on a handful of unfortunate trades.
WHAT YOU SHOULD KNOW
Take the case of my first speculative customer back in 1992. This was a sophisticated assistant treasurer of a major corporation who had previously been a consulting customer of mine in corporate currency exposure management
Yet to come, the Importance of Money Management had been quite successful. This individual opened a personal FOREX account and lost virtually his entire balance over several weeks on his first trade. His leverage had been modest, but he refused to accept the fact that his trade was not working for the reasons he thought it would. This happens much too often with new traders. Manage your money. Conserve your equity. Also, risk capital must only be money that you can afford to lose.
SO ARE YOU READY TO TRADE?
To trade successfully, think like a fundamentalist; trade like a technician.
Here are some trading rules:
Get organized. Keep records of your trades. What was the rationale for the trade, and what happened? It’s a fact that you will learn more from your losers than from your winners. You can be right for all the wrong reasons, but when you are wrong, try to figure out why.
Be a specialist. Don’t trade a lot of currency pairs randomly. Pick out two or three and find out everything you can about them in depth.
Find the best brokerfor yourself. Get information on the current economic situation. Technical traders often eschew the fundamentals. Granted, it can be hard to learn how the fundamentals work, follow them, and make trading decisions based on them, but the effort is worth it. Start out with some basic knowledge of the fundamentals. A daily data calendar and forecasts for the top-tier indicators can at least improve the timing of your trading decisions.
Remember the key market axiom that “It’s not the news but the market reaction to news that matters.” So if the USD does not rally on good news, it tells you that there is something additional working against it just now.
Don’t let a winner become a loser. For heaven’s sake, it’s hard enough to be right on a trade. You can keep a winner frombecoming a loser by letting gains accumulate and by running a trailing stop to protect the profits. A number of academic studies have shown that traders are often too slow to take their losses and too quick to take profits.
This does not mean you will always have a 3:1 profit/loss ratio; weall take what the market will give us. But it is better to aim high than to shoot yourself in the foot. As in life, the truth is often between the two extremes. In FOREX, on the one hand it is difficult to follow the buy-and-hold strategy. On the other hand, excess trading will getyou in trouble, also. Try to find a happy medium between the two. The best advice: Trade the major trend. Sit on your hands but do not let them grow numb. Once you set stops and objectives for a trade, try not to change them. There is a news announcement out there just waiting to spoil your trade and your day.
Do not trade unless you are physically fit. To that end the trader should keep at least a modest physical exercise program. If you do not believe this, I recommend you purchase a blood pressure monitor and take your reading both when trading is going very well for you and when it is going verypoorly for you.
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