Trade Risk Percentage
Just had a question from Amelia which is since Stop-Loss is a dynamic, what percentage of your account should risk on a trade? And sort of do you allow for the fact that you are using a wider stop only as an emergency.
It’s a great question Amelia, well, essentially let’s take this Euro US Dollar pair as an example.
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We have a Euro US Dollar downward bias for the session, there’s been very weak PMI data out this morning from France and Germany and the Euro’s own show to beat contraction in the PMI data, which led to expectations for a very low economic reading for the second quarter for the Euro’s own.
So we have our downward Euro bias. We are also seeing some US Dollar weakness. And the reason for that US Dollar weakness, if we just take a look at the Dollar Index, is with this mixed risk on sentiment, but we’re not convinced by a full risk-on sentiment. So we maintained our downward Euro US Dollar bias and the question is if we’d entered this trade. Say we’d entered this trade here, 108 17.
Where would we have put our Stop-Loss?
Now, the logical place for the Stop-Loss would have just been running above some of these highs here as an emergency Stop-Loss just above the 1.09, so that would be around a hundred points. So that should equate to roughly one percent of your account if you’re trading without leverage.
So, the general rule of thumb that I use is not to risk more than one percent of my account per trade. So you don’t want to be risking more than one percent of your account on any single trade. And you want to allow that full risk on that emergency Stop-Loss, so you would want to have okay that hundred pips is around one percent or less than one percent of your account.
So you don’t Amelia what you might think, well do I allow for the fact that actually I would be taking off the trade much earlier if sentiment changed against me therefore I could risk more.
The problem you have with that kind of thinking Amelia is that it impacts your trading psychology and each pip is worth more value than you necessarily comfortable losing and then that can make it much harder to stay away from messing around with the trade.
So I hope that helps Amelia, to answer that question of how to handle dynamic Stop-Losses and a dynamic Stop-Loss for anyone who is not aware is that if this sentiment changed then we would just pull the trade. So if risk really did turn fully on, and we started to see a further Dollar weakness then that would invalidate the Euro, Euro to Dollar currency pair could have been reason for Euro weakness and US Dollar weakness.
In that case rather than waiting for our stop to be hit, we would just close the trade out as price would have started moving up. But there’s not the price moving up that makes us close the trade out, it’s the fact that the fundamental outlook has changed.
That’s what dynamic about the Stop-Loss is, we close the position as market conditions change and invalidate our outlook.