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The email and my answer below represent the MOST CRITICAL aspect to trading - MANAGING RISK. Take a moment to read this through as it is critical for longevity in this business.
"Hi - I'm very happy at the AUD/JPY trade and looking at this performance I'm pretty excited about the potential.
Being new to Forex I have opened a mini-lot account with GFT as a way of getting to know the ropes, however I could really do with some sensible advice on your recommended account size plus some insight on the largest draw-down experienced over the period highlighted.
In short I'm pretty nervous on the high leverage available and would like some guidance.
Thanks, Richard" |
Richard,
Thanks. Account size is really your choice, there is no right or wrong answer. What is critical though is the size of your trades - that is where people get into trouble.
The first question to ask yourself is this:
"How much am I willing to risk on a per trade basis in terms of percentage of my account?" (Let's assume you start with $5,000 for instance.)
1%? 3%? 5%? - again, there is no right or wrong answer - just choose a number that makes you feel comfortable. Personally, I think anything more than 3% is a bit careless.
With that said, let's say you decide on 3% or $150 ($5,000 * 0.03) of risk on a $5,000 account.
If the trade alert that I issue has a stop-loss of 50 pips, that means you cannot trade more than 3 mini lots (50 pips on 1 mini lot = $50) if you want to not exceed your 3% risk level. If the stop-loss was 150 pips, you could only trade 1 mini lot. A 75 pip stop-loss would allow for only 2 minis. You get the picture.
Under a scenario like this, you will use very little leverage and conduct your trading in a very risk controlled, professional manner. Keeping your risk constant on a per trade basis is critical for longevity in this business.
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