| Inconsistent Risk Per Trade Can Kill Your Returns |
Risk per Trade
This can be a simple or complicated problem, depending on your trading strategy and positions. Most commonly, the risk you are exposed to per trade is your stop loss, plus trading costs. Without a stop-loss, your risk is theoretically infinite. Add transaction costs and slippage to the stop-loss, and you have total risk.
Once you know what your risk is per trade you need to determine whether this is an acceptable portion of your total account value. Risking too much in a single trade will be disruptive to you emotionally and that leads to bad decision making. Many traders start by only risking 2-3% of their total portfolio per trade and may work up over time depending on their risk tolerance and comfort level.
Everyone will have some losing trades. The key is keeping them small and infrequent as compared to your gains. As we see below, size is very important.
See charts, analysis, videos and data by clicking on the flags How much to risk in a single position is a function of the total capital you want to use for a given trade, and your risk tolerance (the maximum loss that is tolerable for you).
But the most important factor in evaluating each trade is consistency. Randomly selecting the amount you will invest in a trade creates inconsistent results and will negatively impact returns. At that point, you have no strategy, just random gambles.
The images below are good illustrations of what happens to a trading strategy when you change your variables frequently. This strategy was back-tested with two different position sizing strategies, one that was constant, and one that was changing.
The system above returned 1,347 pips over the testing period and had a constant tolerable risk.
This was the exact same system, over a similar period of time, but with a randomly selected tolerable loss and position size. The inconsistency created volatility in the account, which ultimately made it impossible to make up larger losses with smaller winners.
The forex has many nuances like heavy leverage and unique margin. A lack of understanding of these factors has caused many a new forex trader to lose their entire trading account. Learn more about the potential pitfalls of margin and leverage with this article.
Building solid rules, and managing consistent trading methods are key in this market.
Comments deemed inappropriate will be removed
3.25 Copyright (C) 2007 Alain Georgette / Copyright (C) 2006 Frantisek Hliva. All rights reserved." |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Learning Markets Partners More Partners | Become a Partner |
 |  |  |  |  |
 |
| Learn to Invest | Reviews of Stock Brokers | Stock Picks | Technical Analysis | Broker News | Investor Education | What to Invest In | Live Market Analysis | Should I Invest? |
