Given the title of the current material represents one of the most common questions among retail forex traders, we at 24ForexSecrets would like to dedicate this article on the matter, and although the answer would be complex, by the end of it we hope to make you understand the implications of risk. Increasing or decreasing market exposure comes with both positives and negatives, requiring traders to be aware of what they are dealing with.
The “2% rule” may not work all the time
When it comes to position sizing, most of the online courses and FX trading-related books talk about the “2% rule”. That means in each and every trade you should risk a maximum of 2% of your account balance. At first glance, it may look like a good idea, since it can help you navigate a string of losing trades, without blowing your entire account. The problem arises in the case of beginners, that struggle with inconsistency, sometimes for years in a row.
Several months of losses can end up with huge losses and significant emotional damage, two of the issues that make most of the traders eventually giving up. As we’ve talked in the past, managing risk is not just above the size of the risk and professional traders should take into account other aspects.
Your experience and trading consistency
Before deciding how much you should risk per trade, there are several questions you need to answer. What FX trading experience do you already have? Are you trading consistently month after month, without long strings of losing trades? Do you deal with losses without being hijacked by emotions?
If the answers to these questions are favorable, it is very likely that sometimes getting past the “2% rule” and risking more per trade would not be an issue. On the other hand, and this is where most of the traders fit, it is important to consider trading accuracy, a more flexible risk management approach that requires you to adjust risk per trade based on different market conditions.
Short-term vs. long-term goals
In our past article, we’ve provided a brief forex trading guide for August 2020, highlighting this would very likely be a quiet period for the market. Increasing the risk per trade to enhance profitability would be a mistake and instead, traders could change the instruments list. The bottom line is that increasing risk per trade might be beneficial in the short-term, but FX traders would need to accept that when a losing streak occurs, their account balance will face large drawdowns. As a result, it’s better to focus on the long run and keep a more conservative risk approach.