In this episode of Truth About FX, Walter answers a classic question: how much risk should I have on every trade? He shares important key points to keep in mind when deciding this. He also touches on building confidence and easy steps that you should take when testing systems…

And, when is the best time to buy a forex tester?

Download (Duration: 08:29 / 9.71 MB)

In This Episode:

00:36 – classic question

02:44 – take off

04:13 – aggressive risk

06:01 – the best time

07:36 – real kicker

Tweetables:

Start by buying a froex tester [Click To Tweet].

Set a risk percentage on every trade.  [Click To Tweet].

Build your confidence through experience  [Click To Tweet].

Announcer: Sometimes, forex trading is a wild and wooly place to be. That’s why Hugh is here, to post your questions to Walter, the naked forex guy. Hugh’s got questions and Walter’s got the answers. Here at the Truth About FX Podcast.

Hugh: Hi, Walter. How is it going?

Walter: Great, Hugh. Great to be back! How are you?

Hugh: Pretty good. Getting back to the swing of things. So, this question is, how much should I risk on every trade?

I guess this is the classic question that everybody asks when they’re getting started.

Walter: Yeah, right. Well, like most things in life, it depends. Here’s the thing, there’s a couple of things to keep in mind. Number one is you will stop trading because of the drawdowns that you experience.

Believe it or not, that is completely under your control. By adjusting the amount that you risk on every trade, assuming of course that you’re using a model where you risk a certain set percentage per trade, set percentage on every trade.

I’ll put in the shownotes, I’ll link up the calculator so that you can go through and calculate this out on your own. If you know what your average winner is, what your average loser is, and what your win rate is, you can determine the likelihood that you’ll reach a drawdown of x%.

Let’s say that you do not want to have a 25% drawdown. Then, knowing your win rate, your average winner and your average loser, you can work this out. That is one thing to keep in mind.

Most people will stop trading because they’ve risked too much and they’ve hit a drawdown that they just can’t stomach. They’ll say things like, “Oh! The market has changed” or “my system does not work anymore, I’m  freaking out.” And then, they’ll go and find something else. That’s the number one thing.

Number two is, what is your goal? What is your goal is the kind of question that I was talking about before when we’re talking about drawdown, which is what your goal should be and what your call is may not be aligned.

What your goal should be is to avoid a drawdown that is going to make you freak out because that is why most traders stop trading their particular system. It is because they freak out.

You can backwards engineer that and figure out the amount at risk per trade to avoid that. The other thing is what if you are the kind of gu...