How much to risk

Beginner Questions
1

just read a pro trader say never risk more than 1% of your trading acct. on a trade… is this true?? Seems very low…

2

Have a look at the comments on risk on the FXCM.com site. Very informative, especially their webinars.

3

There are some factors which go into that decision, but it’s definitely not a bad starting point for someone getting started. Heck, I’d probably even suggest going lower than that.

4

Generally speaking, risk only what you can afford to lose.
Regarding that advice, 1% seems reasonable to me as well.

5

It depends on your perspective.

This is one of the (many) issues on which there are two widely differing consensuses of opinion: if you ask “forex traders in general” you’ll get one answer, whereas if you ask the tiny minority of “people making a living through trading forex” you’ll get a very different answer, which will be a much lower figure. (I don’t mean necessarily “much lower than 1%”, just “much lower than the figure provided from the first group”.) There are reasons for that.

There are ways of working out what appropriate “staking”/“risk-exposure” is, for your methods, according to your win-rate, profit factor and your degree of risk aversion.

There’s an inverse correlation, overall, between the figure people will give and their degree of experience. To new/aspiring traders with very little experience, 1% typically seems too low. To the successful “hardened old pro’s”, it seems too high.

Here are the two important things to be aware of …

  1. It doesn’t matter what the consensus of opinion is: what matters is what’s appropriate for you, your trading, your methods, your edge, your maximum foreseeable “bad patch of results”, and so on. [I][U]You need to learn how to work this out for yourself[/U][/I]. And here’s the book from which you can do so: [I]Profitability & Systematic Trading[/I] (Michael Harris, Wiley 2007).

  2. Be aware that the “longest predictable losing patch” is much more important than the “longest predictable losing run”. Long, consecutive losing runs are very rare. “Patches” of “being unlucky” and having a handful of losers followed by a single win, then another handful of losers followed by a single win, then another handful of losers, are very common. So don’t work out your answer, regarding appropriate risk-exposure, in accordance with the “longest predictable losing run” and hope for the best. That idea has undone a [B][U]lot[/U][/B] of people’s accounts.

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