Everyone’s ability to manage risk is different, and risk tolerance varies from trader to trader. When considering “how much risk” you are willing to take in any given trade – obviously the “size of your position” is paramount. Coupled with the stop level ” (or in my case mental stop level – as I usually don’t use stops) a trader should know exactly how much money they are willing to risk / lose in any given trade – long before initiating it.
A general rule for new traders is to consider a “fixed percentage” of your total account (for example 2%) and plan your trades accordingly – never risking more than 2% on single given trade. So a 50k account for example with 2% risk would allow for a 1k loss on any given trade. If one full lot was purchased of NZD/USD a full 100 pip stop would be used.
I do not trade like this.
When trading foreign exchange it is virtually impossible ( at least for newcomers) to enter the market, and not see the trade go against you almost immediately. This is due to the short-term VOLATILITY in forex trading ( not necessarily a bad trade entry) and must be taken into consideration when figuring out your position size. Some currency pairs range as much as 50 or 60 pips on even a 15 minute time frame – and could range as high as 150 pips on a daily time frame. If you entered a trade in the right direction but only a single day too early – does this mean you where wrong? Of course not. Although without understanding the inherent volatility, you may very likely get stopped out and/or abort an excellent trade idea based on a “little slip” in your timing.
A forex trader must understand the given volatility in each and every individual currency pair they trade – as each exhibit unique characteristics – and in turn adjust position size accordingly.
I would use a much smaller position size trading a pair that ranges 100 + pips a day, than I might in trading a pair that only ranges 30 pips a day. A trader must learn to study each currency pair on its own, and come to learn its individual characteristics.
I get alot of questions about this and the topic could likely run on for several more posts – so for today I’m going to call this Part 1, and plan to let you know how I “position size” on a coming post.
Welcome back everyone – and good luck here in the new year!