Many of us traders have heard we should never risk more than 3% of our account. What I have found after over 100 consultations is that almost every trader whom I have spoken with has traded over 3% up to the point where they have blown an account. The biggest question I have is why aren't traders following this rule?
Let's put this into math terms really quick. A $1000 account with a risk of 3% means the trader cannot risk more than $30. If the traders stop loss is exactly 30 pips plus spread and their targeting profit is 100 pips, the trader's lot size/unit size cannot exceed $0.10/10k. Win or lose the trader will either lose $30 or make $100.
Now that math is out of the way let's look at the pro's and con's to this thinking. First the pro's.
1. 3% is huge for an account this size. Basically, you beat the bank. On average, most people with a savings account will not see $100 added in interest to their account by the end of the year, not even close. You did what the banks cannot do.Congratulations!
2. 3% cannot blow an account in its entirety with that equity.($1000). You played it safe. You took 1 position and controlled the position size. Good job. You followed the rules.
3. Consistently grow an account this way and watch your account balance rise in a matter of time. It is not a race. It doesn't matter how long you get to your goal. What matters is you that you get there.
Now, the con: Yep, just one.
1. If you lose this trade it is not the end of the world. However, what happens if you enter multiple positions this way. For example, you have 3 positions that equals 3% each. You are now risking 9% of your account. What happens if all 3 trades lose?
Let's do quick math again : $30 * 3 positions at $0.10 = $100.
You have now risked lost almost 10% of your account. This is bad, very bad. Remember this, an over traded account is harder to rebuild than a properly traded account and a blown account is hard to build back from scratch.
Most traders have all been in the con seat before. We get greedy and see sparkles when we see other traders making the money we can only hope to make one day. There is nothing wrong with wanting to make the big bucks but, traders forget they have to work up to it. Most traders skip the learning part of trading and go straight to the let's make money now part. Oh so wrong! If traders don't have someone who can scale them back they will go down a slow road of blown accounts and bad trading psychology. By the time they learn the lesson of risk management, the hope of being successful with seem hopeless. But, don't worry. If this is you, you can recover. Just learn the proper way to use risk management.
Here is my tip. Risk no more than 1% until it adds to 3%. Once you have reached 3% stop trading and let your trades hit profit or your stop loss. Yet again, another math example.
3 positions that equals 1% each. I am now risking 3%.
$1000* 1% = $10 risk 100 pips= $100 target profit
$10 * 3 positions at $0.10/10k= $30=risk. $100 * 3 positions at $0.10= $300
Win or lose at 1% per trade at most I lose $30 which is still 3% of my account. If I win, I win $300 dollars. Do you see how it works now?
Most traders want to go big too fast. The quicker you can make it is the quicker you will blow it. I say do the opposite. Start off slow and work your way up. Let the account build. Learn the process of trading before going all in. Don't gamble you money away. Forex is still apart of investing. Treat your account as such.