I’m probably not the only newbie who gets confused about the relationship between these three issues - margin-leverage and risk.
There are certain truisms which are repeated across the forexosphere if I can call it that.
Never risk more than “2%” on a trade
Don’t overleverage
Risk management is key to survival
There’s no argument here over 3) but it’s my understanding of how 1&2 work that I keep wondering about. Wondering if I understand correctly that is
Say I have 5000 UKP as margin in my account. I take a 50,000 trade on GBPUSD which at current rate is say £3 per pip. I set a stop loss of 30 pips i.e £90. Now that to me is close enough to a 2% figure as in I’m risking 2% of my margin. Well I think I am.
If that is true then I need an account with leverage of at least 10:1 to take one trade like that or 20:1 to take two and so on… Or of course smaller lots with the same level of leverage
Actually writing it out like this seems to have helped. But if someone comes along and tells me I’m wrong then oops.
People get way too caught up with the leverage thing. Stick with #1 - replacing 2% with whatever amount suits you best - and so long as your broker allows sufficient leverage to handle the trade(s) then “don’t overleverage” is redundant.
If, however, you start piling on too many open positions or trading too frequently, that could blow you up real quick.
according to my learning so far, never use more than 2% of your capital to trade, say, you have 5000 UKP, never use more than 100 Ukp to trade, no matter what leverage you use. over trade, means open too many positions, that put your capital in high risk, always close one trade, then go to next trade, that’s risk management.
These are very valid points. Please check the threads under "An approach to Risk Management " to read different views on these points. You may find them informative.
for me “Dont use overleverage and never use more than 2% of your margin” is just to make sure that you still have a lot of bullet if you get lose. even if you open more than 1 transaction you still have a bullet if all of your transaction is lose.
this is one of the risk management that i think every trader have. even my self still sometime not foolowing this lesson.
