I read this all the time and can’t figure out why it matters.
Never have a position open that is more then x amount of your account.
IMO If someone is trading a system that has one position open at a time and only risking x amount of pips with a stop loss “equaling 2%” it shouldn’t matter.
Someone clarify please.
This is a good question, and it’s one of the things you should focus on FIRST when starting with trading.
Let’s say you have $1000 in your tradingaccount, and each trade you risk 100% (all-in).
If you lost 50% of the money in this trade. You would have $500.
Ok, so now we have $500 to trade with. How much do we need to make it $1000 again? By this I mean percentage.
The most reasonable is to ‘make up’ those 50% again, right? But it doesn’t work that way, you actually have to DOUBLE YOUR ACCOUNT (i.e 100%) to break-even again.
You see the 2%-5% rules of money management are there to PROTECT YOUR CAPITAL.
Forex Risk Management: Limit Forex Trading Losses by Managing Risks
Read this link and post your questions later. Hopefully, you will notice that using a smaller %-risk ratio is “smarter” than using a big. Even though your wins will be bigger. Don’t try to get rich off of every trade.
Trade smart!
Or… I think it should be that your stop loss should not be more than X percent of your account. In other words you could go all in on a trade but then you would need a real tight stop loss. The smaller your trade size the farther away your stop loss can be and still risk a reasonable amount of your account. but then you have a smaller profit… but you only need small steady gains to make a lot of $. You don’t need to try for home runs. Just go for base hits.
I have read about money management and what not. Let me explain better.
My system requires me to take 1 trade 5 days a week. Now lets say my account is fairly small about 130. I use one 1,000 lot size with a leverage of 20/50 “60 dollars” So with a risk to reward ratio of 1-1.5 “Goal of 30 pips” I have a 20 pip stop and most of the time this works just fine.
Now that you understand how my system works why does it matter how much margin is used in a specific trade? Granted that not all is tied up in one position.
Edit:
Talon that is what I was trying to figure out. With proper stops set it shouldn’t matter IMO how much of the account is tied up into a trade. As long as the stop loss is set right. Though I would like to know traders reasons for only having certain percent of an account in trade.
Let me see of I can explain this… If you do bot have a set amount of capital you would like to risk on every trade it will fluxuate ( which you are saying it’s ok) but if you’re profitable only 60 % of your trades and your risk was always higher on your losing trades vs lower on your winning trades, over time you will still lose all of your money. If you always risk 2% of your capital and you are profitable on 51% of your trades or more your capital will always be safe and you will always be making money (just at a slower rate).
It’s also a psychological safety net when you have a set amount to risk and it’s only 2% you won’t sweat so much when you are in an open trade, so you won’t get greedy, nor get scared as soon as price goes against you.
My rule is 3% risk on all trades and if I lose 3 trades in a row I will stop for the week that way I can never lose more than 9% in a week and I can come back mentally refreshed next week.
I only risk 2% of capital in any trade. Risk being 20 pips and goal being 30. Risk to reward ratio of 1/1.5 Pretty much set forget type of stuff so no sweating is done if I lose I lose better luck next time. 10 cents a pip is just practice anyways. My question isn’t stops its about having a certain percent of an account in trade. If like you said proper risk to reward ratio is set why would it mater how much margin is used “granted that not 100% is”.
Well
Argon is set aside so you never lose your brokers money. They don’t know what your risking in each trade, etc so they can only so what they know to protect themselves. Other people do not have good risk management skills and they would be losing a lot of their brokers money as well as their own of the broker didn’t require margin