No, this isn’t right at all.
People with a $100/$200 account are using micro- or nano-accounts of infinite granularity and can reduce their position sizes downwards to allow for whatever size stop-losses their trading methods need.
micro accounts have min volumes of 0.01
That was why I said “micro- or nano-accounts” and referred to “infinite granularity”.
The point is that your statement above (that “An account of 100 - 200 would only be able to use 10 - 20 pips stops”), as some people are pointing out, was mistaken - and in quite a significant way that’s actually directly relevant to many of this forum’s members.
2% seems arbitrary. Google “Kelly criterion” to understand how you could make better position sizing
Hate to necro, but this is an irritating thread. Yes, we’ve all heard the prescriptions on how much one should risk. “Never risk more than 1% of your account” Everyone asks how much they should risk, without asking themselves what risk is, and how you quantify it.
1% of 100 US dollars is 1 dollar. Virtually anyone is content with losing one dollar or it’s equivalent purchasing power. 1% of 10,000,000 is 100,000. Wouldn’t it be devasting to lose 100,000 dollars? That’s a lot of money, but relative to what you have, it’s not as bad as it seems, yet to tell someone you’ve just lost 100,000 dollars would make anyone turn pale.
Risk is both objective and subjective in my opinion. Risk is not defined by where you set your stop loss, or an arbitrary percentage of your account. I’d like to point out that where you set your stop loss is not a measure of risk at all. Here’s a thought, I could dump my entire account into one trade, set my stop loss 30% below market, and close my trade instantly. How much did I risk?
My entire account? Clearly not. There’s an extraordinarily high probability I lost on the transaction costs, fees, spread, what have you, nothing more.
Risk might be better determined by the mathematical relationship between the return of an asset, it’s volatility, the position size, and the time that it is held. Enter the concept of Value at Risk and other well informed, statistical methods one can use to attempt to quantify and model risk effectively. There are many ways to approach this problem, but some arbitrary percentage is mediocre at best.
Even if you crunch the numbers, I argue there’s another element of risk. What you have. If you’re low, you don’t have far to fall. You can afford to take large risks, because in reality you don’t have much to lose. So what if you blow up your $1000 dollar account? It’s subjective to your goals and your net worth, what matters is that you understand the risks you’re taking, and are fully prepared to lose. With great risk, comes great reward. Better yet, look at using the Sharpe Ratio, just do your homework period.
Another thought, if your win rate is 23%, would you risk 95% of your account on one trade? Probably doesn’t seem sensible. Just like you wouldn’t bet your life savings on a coin flip, because you know the risk. However, if your win rate is 96%, you would probably be confident risking much more. Would you sensibly adhere to the 2% rule with this win rate? It would be incredibly foolish. Hint, Google the Kelly Criterion, and make an effort to actually understand risk management instead of listening to the half baked ideas of retail traders.
1 Like
Toskac
DON’T GO NEAR THE KELLY CRITERION
The Kelly criterion is a stark raving mad theory and an absolute guaranteed way to bust your account !!!
Money management and risk management are essential for survival in the forex market. Each trade requires a risk of 2% or less. If the risk is high, it is not possible to sustain the investment. And 1: 2 risk-reward should be maintained.