Perhaps the best advice that you will receive in your trading career is live to trade another day. Currency markets are volatile, brutal and unforgiving. You should learn to survive in the markets.
The single most common factor that causes many currency traders to blow up their accounts and lose all their money is greed. You start taking unnecessary risks when you get greedy. You will spend many hours trying to find the Holy Grail technical indictor or a forex robot that can make you rich. You will believe that by discovering that secret, you will become rich.
Unfortunately there is no such Holy Grail for anyone. No one has ever found such a secret. You cannot always win. You will win and you will lose. Learn not to risk more than 2% of your account on one single trade. Grow your account incrementally and slowly over time. Never ever get into the temptation to risk big trying to make one single winning trade that can make you rich.
The most important thing that you should know is how much you are willing to risk in a single trade. This is more important than your trading strategy. I said dont risk more than 2% in a single trade. But if you are a risk taker and want to be aggressive, you can go up to 5%. Dont exceed 5%, stay between 1-5%. If you are risk averse and are conservative, on the other hand, you should consider risking between 1-2% only.
Once you have decided on the risk level you are going to take, knowing the rest is simple for you. Suppose you have a $50,000 account and you decide on a risk level of 2% for a single trade. How much you can risk on a single trade? You can only risk (50,000) (0.02) =$1,000, this is the maximum you should risk on a single trade.
However, if you are in more than one trade at the same time, the amount may be higher. Suppose, you are in 3 trades and you risk only $1,000 per trade. So the total amount at risk will be $3,000. Once you have determined your risk level, you are ready to determine the trade size.
Trade size is the number of contracts you purchase in any one single trade. You need to first determine where you want to put your stop loss in order to determine the trade size. Lets use a simple example to make it clear. Suppose you are willing to risk $1000 on trading EUR/USD pair and you decide on a stop loss of 50 pips. Each pip on EUR/USD pair is equal to $10. So the number of contracts that you can trade are 2= (1,000)/ (50) (10).
By calculating your trade size, you have taken the guesswork out of your trading once you have determined your risk level. You can sleep well now. You know how much of your money is at risk. You are going to be able to trade tomorrow. No matter what happens today.
Using these common money management rules will help you avoid the pitfall of losing almost all the money in your account. Learning to survive the markets and trade another day is the essence of trading. This can help your trading take the next level of profitability.
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