A Question of Capital: Risk Levels and Money Management

Filed under: Learn Forex Trading |

Screen shot 2013-05-02 at 10.45.23It is often said that forex traders should not risk more than 2% of their capital on any one trade, but I think that this very much depends on the amount of capital that a trader has.

 

Let’s begin at the top end of the scale – those traders who are well funded. Let’s say that a trader has a trading bank of $100,000, and they hope to make some kind of annual salary to withdraw at the end of the year from their trading account. Thus they might be looking for a minimum of $20,000, which would equate to a 20% rise on their bank (at a minimum). This is perfectly doable, and they might set a risk level of 1% of their bank per trade ($1000), or if they are more conservative, perhaps even 0.5% of their bank per trade ($500).

 

If you only have a bank of $10,000, then you might want to take a little more risk and up your risk levels to 2% per trade ($200). Although this is more risky and you will experience larger drawdowns on your bank, as long as it is money that you can afford to lose, then this will assist you in growing this bank much quicker.

 

Moreover, what if a trader is under funded, and has only, say, $500 in their trading bank? Their aim is to grow the trading bank as quickly as possible, and in order to do this; they need to take on more risk (to begin with at least). Therefore, they risk 5% of the bank per trade ($25), and when the bank reaches $1000, they continue to risk 5% of the $1000 ($50), and so on until they have a reasonable amount to trade with. Once the bank reaches more than say, $3000, they then drop their risk levels to 2.5%, and continue to decrease the risk levels as the trading bank increases.

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