How much capital should I risk?

Forex Trading Nigeria

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Posted by on Sunday September 4, 2011 21:25:24:

One of the thing which makes most forex newbies not last long in the game is the desire for quick huge profits. How would someone hope to double his capital in just a few weeks or month and even though it is possible to do it, it is not advisable.
If you want to really last longer in trading forex and maintain your capital, one of the things you need to imbibe into your system is survival tactics. If you can't survive for the long term, you can't really do professional forex trading.

Let's take and example of someone like Emeka may decide to put in $1000 into his forex account and want to trade. Due to his desire and probably based on stories that he may have heard that he can double or even triple his capital to about $3000 in a month if he trades consistently once a day for 10 or 20 pips and making at least $100 a day.

Now someone may sell him this strategy of using his 100:1 leverage to trade currencies worth $100,000 and to make $1 per pip. He then decides to risk maybe $50 and trade currencies worth $50,000 by buying forex for maybe EU/USD at 1.4550 and placing a take profit pt at 1.4560. Now for those 10 pips, he can make as much as $50 but he can also lose as much as $50 per that single trade and if he loses, his total capital would go to $950 signally a 5% reduction in capital. Now if he loses for 20 days in that month, he would have lost his entire capital.

So here is Emeka's strategy:
Capital: $1000
Leverage: 100:1
Currency pair: EUR/USD
Risk per trade: 5%
pip target: 10 pips

Using the above strategy would not ensure sustainable profitability as you also have to account for your losses too and give that losses are much harder to make up for than profits, this setup may not sustain you for the long term except you are just plain lucky like a gamble but we know gambles don't last in forex.

Now, assuming you have $1000 to invest in forex, a setup like this would ensure more profitability while at the same time maintain your capital because it is based on good money management skills:

Capital: $1000
Leverage: 100:1
Currency pair: EUR/USD
Risk per trade: 1 OR 2%
pip target: 20 OR 30 pips

The general rule is that you shouldn't risk more than 2% of your entire capital on a position or trade so if you have like $1000, you should risk more than .02*1000 = $20 per trade so when setting your stop loss which may be ok with 20 or 30 pips, your total calculation should not cost you more than $20 assuming you lose.

You should always consider a loss and put your stop point immediately you take a position. Being good in calculating figures can help one know how much of your capital to risk or target to focus on. Most people, even when they do see a profitable opportunity tend to put in all their capital into it just because of the likelihood of getting more profit but what I am advising you is don't. Even when you are certain, don' put all your capital into a single position. You may create other positions by buying or selling at or from points different from where you made your last entry. If you think you made a good buy position for instance and the price is ranging, you can create another position with similar margin and minimum risk but at a newer high(like 20 or 30 pips) and then also setting your exit stop to about 2% of your capital. This will help you trade for longer and sustain your capital. Most people tend to get burned in forex because of lack of proper money management by over-trading their account.

A good forex trader doesn't let emotions of greed or indiscipline overtake him when he is working. You shouldn't forget the rules even if you've previously been successful when breaking them. Forgetting the rules always catches up with you in the long term.