How much is it safe to risk in Forex?

Forex trading has to be SIMPLE. Those that complicate it either do not know how to trade or haven’t learned it well. Many enter the trading arena and just start PLAYING with their demo account taking nonsense trades, even worse, thinking that having an account is like going to the casino and bet just for betting sake becomes their motto. They start risking amounts that have nothing to do with the true reality of a live account and spend their trading time in a constant delusion.

For example, the first thing they do is open a demo account with $100000 or even $500000 to “practice”. Practicing isn’t wrong, what is wrong is to think that you will magically be doing the right thing. With such a big amount the newbie trader also takes big trades and here begins the big delusion. Either if he or she wins or loses, the bad capital management will destroy the account sooner or later. The trader will end up risking much more than what is appropriate, be it by abusing the number of lots traded or handling too many currency pairs at a time. The “grand finale” is that one way or another the trader will end up taking this behavior as a habit and will be repeating the same bad habits when confronted to a real live trading account. The trader falls into a vicious cycle. Human beings often act out of habit but this in trading is deadly. If there is no willpower to understand and then get out of the cycle, trading will become more difficult to master.

Let’s imagine a trader opening a $10000 account and who is accustomed to risk 10% of his total capital on each position. Let’s also figure that this unexperienced trader has been losing repeatedly in his first 10 trades. As you can see in the table below, after his tenth loss, the account equity will fall below 35% of starting capital!

In my experience as a Forex teacher I have known traders that risked a lot more and just destroyed their accounts in no time. Traders that risked 20% and more per trade. Watch the following table and imagine the outcome when those “risk-takers” get into a losing streak of 10 consecutive trades while risking 20% on every trade. The account is totally destroyed. This happens daily, especially to those people who try to learn Forex by themselves and have no idea of what money management is about.

When you start trading the Forex the first thing you have to learn is to respect the market and don’t let it kill your account, which is what happens to most inexperienced traders. A trader cannot risk more than 2% of the total equity on his or her trading account. It is a matter of survival first, then as you survive you will have better opportunities to keep learning and mastering entries and exits. This is valid for any account, standard, mini or micro. The total amount of your equity doesn’t matter: you still have to respect the 2% risk limit, only this way can you bring the account back up after a bad losing streak. This happens to any trader, even the best traders of the world experience losing streaks. It could happen to me, and it will happen to you when least expected. Losing is a part of this business and you have to learn to live with it without succumbing.

A trader risking only 2% of the total equity on each trade, could lose consecutively 30 times and yet still keep almost 55% of the funds. This is survival, and intelligent money management, even after such a disastrous series of losses. Now in this case, if you happen to lose 30 times non-stop it would be imperative to check back your strategy as it is quite improbable unless your system has stopped working. But you would still be able to be in the market and correct your mistakes. This is what money management is about.

Many of you enter this world attracted by the fast profitability and accessibility of the currency markets, but you need to learn Forex as thoroughly and formally as you would any other business or career, unless you want to give back your hard earned money. If it wasn’t that way, everyone would be a millionaire, wouldn’t they? Trade with good sense and responsibility, only then will you understand the Forex markets.