Forex Trading And Risk: How Much Is Too Much?
When it comes to trading Forex in particular, people are often way too afraid of the risks of losing money. In reality, there is always risk involved in trading, whether it's Forex or any other market.
Forex seems to have some sort of fame on the internet when it comes to risks, but the truth is that whenever you are trading, there is going to be risks. It all depends on how much you are putting in the table and when.
Trading is all about the right timing and the right amounts, and there are a ton of sources where you can study and find the perfect advice to protect every single one of your trades against adverse circumstances.
How much risk should you take for each trade?
You should always make sure that you know the account risk limit per trade, and this is the most important step when determining forex position size. You will need to set a percentage or dollar amount limit to risk on each trade. Professionals tend to risk 1% or even less of their accounts.
You can use a fixed dollar amount, or an equivalent to 1% or less of the value of your account.
Account risk should always be constant; the best way to do it is always to risk the same amount. Avoid risking 3% on one trade and then 1% on the next.
Translating that into pips
Now that you know how much are you risking on each trade, it is time to turn your attention to the business itself. Pip risk on trades is guided or determined by the difference between the entry step and the point where you place your stop-loss order.
Remembering that a pip is short for "percentage in point" or "price interest point, it is the smallest part of the price of a currency that changes. For most currencies pairs, a pip has a value of 0.0001 or 1/100th of a percent. The couples with the Japanese yen have pips with a value of 0.01 or 1 percentage point. Pip risk can vary depending on volatility or strategy.
How much exactly are you risking per pip?
It depends on your currency pair. If the second currency is the U.S. dollar and your account is funded with dollars, then your pip value depends on the size of your order (lots). For micro-lots, the pip value is often $0.10, for a mini lot, it is $1, and for a standard lot, it is $10.
If your second currency of the pair is not the U.S. dollar, but your account is funded with dollars, then you will have to multiply the pip values by the exchange rate for the dollar and the second currency.
2% should be your aim for trade risk
The perfect risk percentage for most Forex traders seems to be 2%. If you make it a more significant number, like 10%, and you happened to go through a bad losing streak, and you lost 19 trades in a row, you will be losing almost 85% of your account. If you decide to risk only 2%, you lost only 30% of your total account.
Even if you never end up losing more than ten trades in a row, there will always be a big difference between the numbers with those two approaches.