Article Summary: Risk management is an important skill for every trader to master. Today we will approach containing Forex risk using the 5% rule.
One of the most difficult trading traits for new Forex traders to master is risk management. Questions about stop placement are common place, but often traders forget the bigger question when it comes to risk. Before you enter the market or consider opening new positions ask yourself the following question.
How much of my account should be at risk at any given time?
Most professional traders consider the 5% rule when managing their trading positions. This rule implies that if all open positions are closed the TOTAL loss to an account would not exceed 5% of their account balance. Below you will find using a basic calculation using the 5% rule on a $10,000 account. That means on any give trading day, if all positions are closed at a loss this trader will only experience a loss of $500.
While no one wants to experience a 5% draw down in their account balance, remembering the above equation can help traders from completely devastating their account. In the above example, even after losing $500, the traders still has the remaining balance of $9500 available for trading. Let’s take a look at what can happen when a trader ignores these rules.
It should be noted that the 5% rule does not equate to risking 5% of your trading account on one particular trade. Imagine if you had 5 trades open, each risking 5% of your trading account. If all positions were closed for a loss that means you would be assuming a loss of 25% of your total account size. To put things in perspective, using the starting balance of $10,000 mentioned above, that would equate to a loss of $2,500 and only leave you with a balance of $7500! This is a scenario that every trader can manage to avoid if they apply this one simple rule.
To help traders control their risk, programmers at FXCM have created a simple indicator to help decipher how much risk is being assumed on any one particular trade. Once added to Marketscope 2.0, the FXCM Risk Calculator has the ability to help a trader calculate risk based off of trade size and stop levels. This tool is great and to help hold our selves accountable to a predefined strategy that includes proper risk management. To learn more about the FXCM Risk Calculated visit the FXCM App Store.
To contact Walker, email instructor@dailyfx.com. Follow me on Twitter at @WEnglandFX.
To be added to Walker’s e-mail distribution list, CLICK HERE and enter in your email information
Are you looking for a scalping strategy for the FOREX market? Sign up for our free CCI trading course! CCI Training Course
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
FAQs
Most professional traders consider the 5% rule when managing their trading positions. This rule implies that if all open positions are closed the TOTAL loss to an account would not exceed 5% of their account balance. Below you will find using a basic calculation using the 5% rule on a $10,000 account.
What is the 5 percent rule in trading? ›
5% Rule: This rule applies to the total risk exposure across all your open trades. It recommends limiting the total risk exposure of all your trades combined to no more than 5% of your trading capital. This means if you have multiple trades open simultaneously, their combined risk should not exceed 5%.
What is 5% margin in forex? ›
If the forex margin is 5%, then the leverage available from the broker is 20:1. A forex margin of 10% equates to a leverage of 10:1.
Is risking 5% per trade too much? ›
A good rule of thumb is to risk between 1% and 5% of your account balance per trade.
What is 90% rule in Forex? ›
It goes along the lines, 90% of traders lose 90% of their money in the first 90 days. If you're reading this then you're probably in one of those 90's... Make no mistake, the entire industry is set up that way to achieve exactly that, 90-90-90.
What is the 5-3-1 strategy in Forex? ›
The 5-3-1 strategy is especially helpful for new traders who may be overwhelmed by the dozens of currency pairs available and the 24-7 nature of the market. The numbers five, three, and one stand for: Five currency pairs to learn and trade. Three strategies to become an expert on and use with your trades.
Can I trade forex without margin? ›
Is It possible for newbies to start trading Forex without leverage? Although newbies are always advised to use leverage to grow their trading accounts, it is not always necessary. Beginners can trade without leverage and still profit so long as they have the required amount of money to start trading.
How do you calculate 5% margin? ›
To calculate your margin, use this formula:
- Find your gross profit. Again, to do this you minus your cost from your price.
- Divide your gross profit by your price. You'll then have your margin. Again, to turn it into a percentage, simply multiply it by 100 and that's your margin %.
A good margin level is typically considered to be above 100%. A margin level of 100% indicates that a trader's equity equals the used margin, which is the minimum level required to keep positions open.
How many pips should I risk per trade? ›
Never Risk More Than 2% Per Trade - BabyPips.com.
The 1% risk rule means not risking more than 1% of account capital on a single trade. It doesn't mean only putting 1% of your capital into a trade. Put as much capital as you wish, but if the trade is losing more than 1% of your total capital, close the position.
What is the 2 percent rule in forex? ›
The 2% rule is an investing strategy where an investor risks no more than 2% of their available capital on any single trade. To apply the 2% rule, an investor must first determine their available capital, taking into account any future fees or commissions that may arise from trading.
What is the 5 day trading rule? ›
Who Is a Pattern Day Trader? According to FINRA rules, you're considered a pattern day trader if you execute four or more "day trades" within five business days—provided that the number of day trades represents more than 6 percent of your total trades in the margin account for that same five business day period.
What is the 3-5-7 rule in trading? ›
What is the 3 5 7 rule in trading? A risk management principle known as the “3-5-7” rule in trading advises diversifying one's financial holdings to reduce risk. The 3% rule states that you should never risk more than 3% of your whole trading capital on a single deal.
What is 5 handles in forex? ›
Handle definition
In most markets, it means the whole numbers involved in a quote price, without the decimals included. In forex, it refers to the part of the quote that you see in both the buy and sell price.
What is the golden rule in forex? ›
The golden rule of Stop Losses is that they should never be moved away from the market once the trade is opened. If a trader feels that their stop loss is incorrectly placed, they are recognising that the foundations of their trade are incorrect and therefore they should close out.
