Simple Trading Mistakes
Cost You Lot of Money
The 2% rule is a
powerful tool in Forex
trading. By adopting
this rule you're using a
strategy that decreases
the size of your losses
during losing streaks,
an important
consideration. There is,
however one small caveat
that you need to be
aware of when using the
2% rule to calculate how
many Forex shares you
are going to buy. As you
know, the number of
shares you can purchase
is determined by your
maximum loss and the
size of your stop. This
means that by increasing
your risk, you can also
increase the dollar
value of the position
you open. By simply
shrinking your stop
size, that is by setting
a tighter stop loss, you
can increase the dollar
value of the position
you open.
To avoid a situation
where you could end up
with excessively large
positions that may put
your Forex trading float
at risk, you can choose
to introduce an extra
rule. This rule would
limit the dollar value
of a position to be no
more than a set
percentage of your
entire Forex trading
float.
For example, you might
decide that you'll never
open a position that has
a dollar value of more
than 25% of your entire
Forex trading float.
This rule would only be
executed if, after
calculating the formula
that determines how many
shares you buy, you find
the dollar value of that
position would greater
than 25% of your float.
If this happened, you
would scale down the
position to make sure it
did not exceed that 25%.
The percentage that you
decide upon will depend
on the type of system
you're trading, the size
of your float, and your
personal tolerance for
risk. Generally, smaller
Forex trading floats
might use 25%, and
larger Forex trading
floats might use as
little as 10% or even
5%. There are no
definitive numbers, and
the percentage that you
choose will depend on
your personal
circumstances.
Once this tendency is
corrected for you will
have all your money
management rules in
place, ready to control
your risk in the Forex
market. Now you need to
take the next step. Test
your system to find out
which of the variables
best suit you,
remembering always that
position sizing is the
most significant part of
any system design. It is
the lynchpin of money
management. Once you've
tested your system, and
fine-tuned your rules,
you will be well on your
way to becoming a
successful Forex trader.
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