This video looks at how to manage risk (sticking to the 1% risk rule) and how to get the correct position size, on every trade, so that you stay within your risk tolerance. In other words, positions are never too small or too large, they are just right. This is the fourth video in the free Forex Swing Trading in 20 Minutes video course.
Practice placing orders and getting the ideal position size in a demo account before live trading. Some of the most common–and disastrous–trading mistakes are related to taking the wrong position size. Adding a zero or skipping a decimal place on your forex position size can mean huge risk and losses.
While demo trading, always double-check your position size before placing a trade. Once you’ve placed the trade, as a final check (as shown in the video) hover your cursor over your stop loss so you can see the dollars you are risking —that amount should be about 1% of your account capital.
It’s important to watch the other videos in the Forex Swing Trading in 20 Minutes video series for some context on this forex risk management and position sizing video:
Vid. 1. Forex Swing Trading in 20 Minutes – Pairs to Follow and Setting Up Charts
Vid. 2. Forex Swing Trading in 20 Minutes – Time Frames and Trend Trading Strategy
Vid. 3. Forex Swing Trading in 20 Minutes – Crotch Strategy and Strong Support and Resistance
The most basic risk management strategy is to control the amount you lose on each trade. I cap my risk at about 1% of my capital per trade. That means if you have a $2000 forex account, you can lose up to $20 per trade. If you have a $10,000 account, you can lose up to $100. If you have a $500 account, you can only lose up to $5 per trade.
Risking 1% may seem like a small amount, especially if you have a small account, but you can grow your capital rapidly by keeping your risk to 1%/trade. This is because even a losing streak of several trades in a row won’t hurt you. Also, your wins are always bigger than your losses, so even if you only win 40% or 50% of your trades you are going to be pulling cash out of the market. Over time, as your account grows, your percentage gains will translate into bigger dollar amounts each month. Keep risk to 1% per trade to enjoy that payoff.
Risk on each trade is determined by the pip difference between your entry and stop loss price, multiplied by the pip value and the number of lots you take on each trade. The video shows how you can fine-tune your position size (without math) in order to find the exact position size. To see the math on calculating the ideal position size, read How to Determine Proper Position Size.
Hope that helps you out!
Here are the next videos in this free forex swing trading course:
To learn more about how to day trade and/or swing trade forex, including basics to get you started, strategies and a plan to get you practicing and successful, check out my Forex Strategies Guide for Day and Swing Traders 2.0 eBook.
Cory Mitchell, CMT