Many analysts advise that your risk per trade should always be a small percentage of your total capital. A good starting percentage could be 2 percent of your available trading capital. For example, if you have $5,000 in your account, the maximum loss allowable should be no more than $100. By analyzing the market from all points of the Invest Diva Diamond analysis, you can stack the odds in your favor and then manage your risk per trade.
Managing risk per trade literally means setting your stop and limit orders, which we talked about previously. In order to decide the size of your trade allowable risk, advisable leverage, and so on, you can simply use the following magic formula:
Loss (or profit)/pips (stop or take profit) = size
Does this look confusing? Let’s take it one piece at a time. Let’s say you have done all your market analysis, and you are confident that the markets are going to move in a certain direction for a certain number of pips. Now you have two options:
- Choose your trade size based on the profit you think you can make.
- Choose your trade size based on the loss you can afford to risk.
Choosing your trade size based on the possible profit is how men usually trade. They are more goal-oriented and challenge the market to win.
Which of these choices do you think Invest Diva would recommend? If you said number two, you are a true Forex Diva! Although it may sound a bit negative, it’s always better to be safe than sorry. So as a Forex Diva, we always calculate our investment capital based on risk management calculations.
So here is one scenario. After you are done with your market analysis, it is time for you to decide how much loss you are willing to risk in order to gain that profit. First, you should calculate the size of your trade. What you need to do is to simply put the numbers into the following magic formula and find the size of your trade:
You can also put in any two of the three terms to get the third. In case you don’t have enough money to cover for the size, then you can move on to using leverage, keeping in mind that you may lose the exact same amount. Therefore, you need to feel comfortable with investing that amount of money.
In the previous Coffee Breaks, when we discuss case studies, we will go through a number of trading examples so that you can see vividly how to analyze the market and use the formula just given.
