If you ask anyone why they started trading forex, they will probably tell you to make quick money. Although its true that you can actually make quick money in the forex market, but your risk has also got to be higher. How many articles have you read and how many people have you met who tell you never to risk more than say 2% of your trading account balance per trade?
Lets take an example of the 2% risk rule. Say you have a $1000 account and you want to enter a trade which has a stop loss of 50pips. To calculate your correct position size, 2% of $1000 = $20. You should not risk more than $20 on any trade. So if your stop loss was 50pips you would trade 4 micro lots on this particular trade. Taking into account your Risk to Reward of a minimum of 1:2 you may set a take profit of 100 pips and gain $40. Not exactly the big bucks you came to make in the forex market is it?
Here is an insight to how I handle risk, break the 2% risk rule and still end up profitable. When I just started trading I realised I wasn’t really getting anywhere, I was profitable but putting in 50 hours a week and making $60 wasn’t why I started trading forex. Hence I decided it was time to change things around a bit. I was making Pips but not making the dollars I wanted to make. So I gradually increased my position sizing.
I went back to my trading journal and realised there was not a single month where I had a net loss of more than 300 Pips. This was a very encouraging for me. I continued trading for a few more months after which came the big adjustment. My journal showed me that with my price action strategy it was REALLY difficult to loose 1000 pips on the trot! So I ignored my account balance and started trading with pips, i.e. I took my account balance to be 1000 pips and trade with that.
Going back to our original example, you have a $1000 trading account. Convert that to 1000 pips and it means you have $1 for every pip. Most brokers when you trade a mini lot give you round about $1 per pip on most currency pairs. So going back to the same trade above with a stop loss of 50 pips I would trade 1 mini lot, be prepared to loose $50 and gain at least $100! Incase my stop loss does get taken out I would still have 950 pips to play with. Extremely unlikely to loose 1000 pips on the trot!
An old friend once said “you have to risk it to get the biscuit.” Feel free to leave a comment below and let me know how you handle risk.
Written by: Zohaib Mohammed (Portfolio Manger) Sz-Ventures.