Thanks Snowman - my point was that if losses are strictly controlled to 2% of current equity, then, practicalities aside, no number of losers will get you to zero.
Anyway, it is often said that 2% is the amount to risk per trade. I wonder where this figure comes from. Why not 1%, 5%, 10%?
New Forex traders need to spend the time thinking about and understanding how leverage works, as well as how news and economic data will affect their trading plan.
New forex traders coming from an equities background, who are used to trading a cash account, understand that the profit and loss of their account is correlated on a 1 to 1 basis to the Value at Risk (VAR). In other words, a 10% rise or decline in the price of the stock will result in a 10% gain or loss on the cash position in their account.
Government regulations overseeing the equities markets allow traders to borrow up to 50% (2 to 1) of the purchase price of their securities for overnight positions and 4 to 1 intraday. A 10% move in a stock with 2 to 1 leverage will result in a 20% gain or loss on the cash on cash position in the account. A 10% move intraday with 4 to 1 leverage would result in a 40% change in the cash on cash value of the account.
Since a Forex account can be leveraged 100 to 1, a 1% move in a fully leveraged position would create a 100% gain or loss of the cash on cash value in your account. For each of the leverage changes in the previous examples the risk associated with the position changes dramatically. With the increased leverage of Forex trading, your trade plan must be adjusted to account for a shorter time frame in which to react to market news and or price changes. You cannot be trading Forex like a poker player and go "all in"; the increased margin creates too great a magnified movement in your profit and loss.
One solution offered by many Forex traders is to incorporate into their Forex trading plan the 2% rule. No more than 2% of the account value becomes the maximum amount the trader is willing to risk on a trade. This 2% becomes your "Value at Risk" VAR or (.02*Account Value=VAR). The VAR is then divided by the pip value to determine how many pips it takes to hit your max loss. The number of pips is deducted/added to the price bought or sold to determine placement of the stop loss.
For instance an account value of $10,000.00 would risk $200.00 on any one trade. A currency pair with a pip value of $10.00 would have the stop loss 20 pips away from the entry price. This is an easy tool that many use to help define risk within their accounts. Many experts have their own solutions' to position sizing.
Author Van Tharp has written an entire book: "Definitive guide to position sizing" that outlines his premise on the absolute importance of not overdoing leverage and using position sizing to meet your objectives. It is his belief that this ONE tool is one of the most valuable, if not the most valuable tool to add to your trading system.
Read the whole thing =
http://www.tradingmarkets.com/.site/forex/how_to/articles/How-to-Avoid-the-Common-Pitfalls-in-Forex-Using-Pr-80119.cfm
And this was good reading today =
http://www.marketwatch.com/story/how-i-lost-100000-trading-currencies-2010-09-23
You are on the internet - If you (google) search for it, you'll probably find it. :smart:
