Building a Trading Bank and Choosing Risk Levels

Filed under: Learn Forex Trading |

Screen shot 2013-04-16 at 11.22.07Choosing your risk levels when trading forex is all about deciding what you are comfortable with, and in understanding the risks involved with losing your trading bank. As a starting point, you need to know what your maximum drawdown might be, and in order to know this you will have to have traded on a demo account for some considerable time. Let’s say that you have been risking 2% of your trading bank on each trade on your demo account, and over the course of a few hundred trades, your maximum drawdown is just 20%. This is fine, but deciding on your risk levels on a live account very much depends on your threshold for pain, and on your starting capital.

 

For example, let’s say that you have capital to invest of $100,000. Based on the 20% drawdown figure, could you handle a $20,000 drawdown on the account and keep trading without emotion? Probably not – and you might be wise to lower your risk per trade to 1% or even 0.5%. However, suppose you only have a trading capital of just $500. This money, you can afford to lose, and you want to build the bank as quickly as possible. In this scenario, you might increase your risk levels to 5% per trade and hope to increase your bank quickly. Once it reaches a more significant amount, say $2000, you could then decrease your risk a little to say 2.5% per trade, which is a little more conservative and risk averse.

 

The general rule of thumb is that, the higher your risk levels, the more chance you have of blowing up your trading bank. However, when trading with small amounts of capital, it might be not worth your while to trade with low risk levels, and as such, you may want to increase these risk levels until you have grown your trading bank a little. You could do this by being more selective in your trades, and only taking the best trade setups.

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