Where To Place Stops In Forex
Where To Place Stops
Some sources advise that you should not risk more than 2% of your funds on a single trade. This is good advice. The problem with it is that if you only have a small balance, your stop loss could be so close to your opening position that it will be triggered by normal, meaningless fluctuations in the market. That is bad news. Let’s take an example to illustrate this.
Many people open a mini forex trading account with $250. If you are risking just 2% of your funds on each trade, that would be $5. In our EUR/USD example, that is 5 pips. Remember that the spread in this example is 2 pips. So your stop loss would have to be set just 3 pips below the opening price to ensure that you did not lose more than $5. That is too close and it could be triggered too soon, so that it would lead to overall losses even when your predictions were generally correct.
Because of this, it may be better to operate with stop losses at 4% to 5% of your fund while you only have such a small balance. That gives you a range of up to 10 pips in which to place your stop loss, depending on the volatility of the market. However, you should be aware that this will mean that your fund is more vulnerable if you have a run of losses. For this reason, we would advise you not to start trading with real money if you only have $250 available. We would recommend setting aside at least $1,000 and preferably more. You do not have to put it all into the trading account at once, but the rest should be held back in a savings account, separate from any other savings or investments that you have.
When you keep your trading records, treat the whole $1,000 as your fund. Then you can operate with reasonable stop losses but still never have to risk more than 2% of your total fund on each trade. Of course, all of this fund should be money that you can afford to lose and do not need for any other purpose.
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