Here is a bit of useless information that may be handy to other cowboys like me:
The general consensus seems to be that ‘you never risk more than 1% of your capital on any single trade’ and I have always just taken it mean that if you have $5 000.00 USD in your account you should not open a position that costs you more than $50.00 USD i.e. cost is 1%.
Well - here is the thing: if I interpreted it correctly then I think a better basis for the calculation of the 1% should be the cost of the lot + the cost of the spread = total risk.
Why do I say this? Because if you are interested in trading exotic pairs or commodities like Gold - you will notice that the spread is much higher because of the volatility of these instruments - so a slight movement either created profits or losses exponentially. In other words - buying 1 lot of EUR/USD for $50.00 USD is not the same as buying 1 lot of Gold for 50$.00 USD - trust me on this. In other words - let’s say that the cost of a lot is $50.00 USD and the spread is $45.00 USD then you should not be opening a position on this instrument unless you have $9 500.00 USD capital.
Now I am not going to tell you why I make this statement - let’s just say that because of the fg analysts on Bloomberg coupled with the banks in Europe fg with the Gold price and combined with my greed - my tuition fees have just gone up again.
Put it this way - and this is not joke - and please do not tell me to just cut losses - but I refuse to believe that there is no scientific method or algorithm that could be applied to hedged positions in order to close them out one by one without writing off the losing side of the hedged position i.e. there must be some way to ‘scalp’ either side of the swing until either break even or profit - particularly if you are hedged right in the middle of the range.
Oh - I can already hear the ‘I told you so’s’ - what can I say - on a high volatility instrument like Gold you would be suprised what a 550 pip change can do to your margin! Hence my advice above!
Oh - if anybody is in the mood to get involved with idea - please feel free. I now have $8 000.00 USD caught in a swing which I cannot draw down on!