It really should be a rare moment when all the stars align for you. To keep yourself disciplined you should try to ensure that no more than one in twenty trades are graded exceptional and allocated 5% of account balance risk. However, this should always be subject to overall position sizing constraints.įor example before you put on each trade you might rate the strength of your conviction in the trade and allocate a position size accordingly: Similarly, like poker players, we should risk more on trades we feel confident about and less on trades that seem less compelling. So you have to accept losing trades will be common and ensure you size trades so they cannot ruin you. This allows us to go big on themes we like without going bust when the theme does not work.Īs we’ll see later, many traders only win on 40-60% of trades. The total amount of risk in our portfolio - if all of the trades on this EUR-momentum theme were to hit their stops - should not exceed $8,000 or 8% of total capital. We are going to look at this concept of correlation in more detail later. But if it goes wrong we are likely to lose on all three at once. If it works all three bets are likely to pay off. Now imagine that we have similar bets on EURJPY and EURGBP, which have also broken above moving averages. You should be using this calculator (or something similar) on every single trade so that you know your risk. If it reaches our stop level we know we’ll lose precisely $2,000 or 2% of our capital. So the appropriate size is a buy position of 363,636 EURUSD. There are many such calculators online - just google "Pip calculator".
We go to the calculator page, select Position Size and enter our details. We look at a technical chart and decide to leave a stop below the monthly low, which is 55 pips below market.
We should therefore not be risking more than 2% which $2,000. For now let’s just accept those numbers and look at examples. We’ll look at why that’s a rule of thumb later. Position sizing is what ensures that a losing streak does not take you out of the market.Ī rule of thumb is that one should risk no more than 2% of one’s account balance on an individual trade and no more than 8% of one’s account balance on a specific theme. It is the amount of money you have deposited and can withdraw or lose. Your trading capital is not the leveraged amount. Seriously, avoiding mistakes is one of the most important things: there's not some holy grail system for finding winning trades, rather a routine and fairly boring set of processes that ensure that you are profitable, despite having plenty of losing trades alongside the winners.Ĭapital and position sizing The first thing you have to know is how much capital you are working with. Anyone can learn and follow best practices. The great news is that this stuff is pretty simple and process-driven. Strangely, if you look at retail trading websites, for every one article on risk management there are probably fifty on trade selection. Look at any serious hedge fund’s website and they’ll talk about their first priority being “preservation of investor capital.” Why it matters The first rule of making money through trading is to ensure you do not lose money. The first topic is Risk Management and we'll cover it in three parts I guess there would be 15-20 topics in total so about 50-60 posts. When I get time I'm going to write a mid-length posts on each topic for you guys along the lines of how i was trained. This is very different to being a full-time home trader, although that is not to discredit those guys, who can accumulate a good amount of experience/wisdom through self learning.
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I worked at an investment bank for seven years and joined them as a graduate FX trader so have lots of professional experience, by which i mean I was trained and paid by a big institution to trade on their behalf. I have been using reddit for years in my personal life (not trading!) and wanted to give something back in an area where i am an expert.
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