Account Risk

Whenever you open a trade, you are risking money. Even if you have a stop loss, you might suffer negative slippage and lose more than you accounted for. Obviously, if you have a large number of trades open at the same time, even if they all make sense at the individual level, they might together constitute an unacceptable level of risk. Likewise, if you have a lot of trades open that are all betting on the same currency in the same direction, you run a risk of a sudden loss beyond what is acceptable. 

For these reasons it is a good idea: 

- To determine a maximum size of open trades that you will have at any one time; and  

- To repeat the above but per currency. 

 For example, you might determine that you will never have more than 2% of your account size at risk in open trades, or 1.5% at risk on a single currency. You should also be extremely careful when trading in currencies that are pegged or capped against another currency by their respective central banks. For example anyone who was short the Swiss Franc last January using even a relatively very small true leverage of 4:1 would probably have had their account wiped out, regardless of any stop loss, as the slippage was so great. 

To a lesser extent, if you are trading currencies or other instruments that have high positive correlations, you might also want to put a limit on total open trades which are strongly positively correlated. This becomes more important if you are trading beyond Forex, for example oil and the Canadian Dollar have a high positive correlation. 

The exact amount of maximum risk you should use is up to you, but keep in mind that once your account is down by 25%, you need to increase it by 33% just to get back to where you started, and the lower you go the worse it gets: a loss of 50% requires an increase of 100% to be made good! Generally speaking, the larger the stop losses you use, the higher your maximum risk can logically go. Read more ...