Bankroll Management in FX Trading – How Much To Trade?
How Much Should You Risk Per Trade?
This is one of the most commonly asked questions by our members. How much should I put on a trade? The general information is very black and white. 1-2% of your bankroll. And for lower level traders this is generally what I recommend. If you are using a lot of leverage then you should only be risking 2% of your trading account maximum. That’s stop loss 2%. So for example if you have £10,000 in an account, then when you calculate your stop losses, the value should only equal £200 or less. Otherwise you are playing with fire! Even if you are extremely confident about a trade you shouldn’t risk more than 2% of your bankroll. Forex trading is a marathon, not a sprint so it’s important keep the right mindset and to stay level headed BUT, there is a BUT.
Probability is something that is not mentioned enough in forex trading. Everyone talks about risk vs reward. Ensuring you have at least a 1-1 but no one talks about the probability that a trade will go in your direction. This is something that we are going to talk about today in relation to how much you should trade.
So if you are very new to trading then you shouldn’t risk more than 1% of your bankroll regardless of the trade.
If you are an intermediate trader then its time to make some profits and mitigate risk. To do this I like to weigh different strategies against one another. For example in some strategies I do not have stop losses….. (gasp), the reason is because the trade is a 90% strategy. We may only make 10-20 pips but this is something that is almost guaranteed and if we have stops the market can creep up and stop us out before coming back down to where we expected. Of course these trades I do track live so if the market does something crazy I will get out but this is so rare and is usually only news based (which in my opinion is a joke) and the markets usually calm down to where they were pre-news. Unless its something like an election or brexit…
So if we have a trade that is 60% we should put about 1-1.5% of our trading account on. This needs to be “at least” a 1:1 risk reward too. But remember you can actively manage your position. Don’t take profits early or stop losses too close. If we have a system that doesn’t appear very often but has an 80% probability of hitting targets then we will put 2-3% of our account on this trade. This principle is referred to as the Kelly Criterion and involves placing larger trades on set-ups you are more confident in (makes sense really.)
That’s pretty much it.
If you are a newbie trader just keep in mind the maximum you are willing to lose and relate this to your stop loss, whether this be your set stop loss or your actual “in your head” one. Remember probability and trading strategies are different. We have strategies that hit only 50%, why do we still take them? Because when they hit we get a 1:3 risk to reward ratio, this means we can earn a lot more on the times we are correct than we are when we are wrong.
Good luck and cheers.