One of the questions I get most often is: Could you give me some guidance regarding what kind of Trade Management guidelines to use with my trades?

I have seen various opinions about risk and position sizing. Although it is always a personal decision based on risk tolerance and other factors, it seems risking between 1-2% of your account per trade is a prudent and practical approach.

I recommend focusing on your overall portfolio - IRA's, 401k's, pension plans, brokerage accounts etc. Use that total value figure as your baseline. Forget about the drawdown on your FX account.
For example - if your portfolio collectively totals $200,000 then risking 1-3% of that value ($2,000-$6000) on a per trade basis in your FX account is reasonable.

Sure, if your FX account had a balance of $20,000, you might take a hit, however, the reverse happens on the upside. If you have a winning trade of $5,000, you look at what that means to your overall investments.

If you lose $2,000 or 1% of your portfolio, it’s not a real big deal. You can recover from that so my recommendation is to use the leverage afforded you in your FX brokerage account and trade based on your total investable assets.

Naturally, you never want to pick a percentage that is too big (over 5%) because consecutive drawdowns in that scenario can make it difficult to recoup your losses. The chart below illustrates that better than any words.

fxsoriginal

There is certainly more to discuss on this topic but that will be enough for today’s update. Part 2 on this very important topic will be posted on July 21st.

Any reviews, news, research, analysis, prices or other information contained in this article is provided as general market commentary, does not constitute investment advice and may undergo changes from time to time. Trading the Financial and Currency Markets on margin carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as to your favor. Before entering trading Financial and Currency Markets, you should carefully consider your investment objectives, level of experience and risk appetite. There is a possibility that you could sustain a loss of some or more of your initial investment and therefore you should not invest money which you cannot afford to lose. You should be aware of all the risks associated with Financial and Currency Markets trading, and in case you have any doubt, rather seek advice from an independent financial advisor. Scandinavian Capital Markets AB, its owners, employees, agents or affiliates do not give investment advice, therefore Scandinavian Capital Markets AB assumes no liability for any loss or damage, including without limitation to, any loss of profit, which may be suffered directly or indirectly from use of or reliance on such information. Scandinavian Capital Markets AB strongly encourages consultation with a licensed representative or financial advisor regarding any particular investment or use of any investment strategy.

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