Risking Excessive Amounts of Capital in a Single Trade

Risking Excessive Amounts of Capital in a Single Trade

Most of the common forex trading mistakes that have been discussed around the internet mostly with trading strategies rather than in money management techniques.  While money management is generally viewed as one of the more boring and less glamorous aspects of the trading process, it is one of the most important aspects of trading and one that can make or break you as a member of the forex trading community.  “If you fail pay strict attention to your money management techniques,” said Haris Constantinou, currency analyst at TeleTrade.  you will eventually be faced with some severe account management problems and come into some serious risks for depleting your entire account value.

Rules for Risk

Once that these potential difficulties are understood, we can start to define strict trading levels so that excessive risks are not undertaken.  As a primary trading rule, most experienced investors will limit their risk levels in each of their trades to no more than 1% – 2% at any given time.  Of course, risking larger amounts of capital on your trades will open up the possibility for larger gains.  But your primary concern in any trade should not be the level of profitability.  Instead, your focus should be the potential losses that you are exposed to at any given moment.

At this stage, you might be thinking “I didn’t get into forex trading to focus on losses; I got into the forex market to produce gains and make money.”  But at the same time, it can be argued that the best way to produce gains is to limit those losses, as this will have a drastic (positive) effect on your overall profit and loss ratios.  There is no such thing as a 100% guarantee in these markets, so your initial concern cannot be centered on potential gains.  The unfortunate reality of the forex markets is that nearly all traders that risk excessive amounts of capital end up losing their money in the long run because a single loss can wipe out many gains if leverage and position size is not proportional. 

Portions of the Whole

The 1% to 2% rule should be viewed in terms of your total account size, so if your trading account is $10,000, you should never be risking more than $200 at any given time.  It should be remembered that this $200 would include all open trades (and be calculated by using the difference between current prices and your plotted stop loss levels), so, if you have two open trades, the maximum loss for each should be no more than $100 dollars.  Also, it should be remembered that your open trades can risk less than this – this 2% figure is simply the upward limit.