Walker England
Article Summary: Risk management is an important skill for every trader to master. Today we will approach containing Forex risk using the 5% rule.
One of the most difficult trading traits for new Forex traders to master is risk management. Questions about stop placement are common place, but often traders forget the bigger question when it comes to risk. Before you enter the market or consider opening new positions ask yourself the following question.
How much of my account should be at risk at any given time?
Most professional traders consider the 5% rule when managing their trading positions. This rule implies that if all open positions are closed the TOTAL loss to an account would not exceed 5% of their account balance. Below you will find using a basic calculation using the 5% rule on a $10,000 account. That means on any give trading day, if all positions are closed at a loss this trader will only experience a loss of $500.
While no one wants to experience a 5% draw down in their account balance, remembering the above equation can help traders from completely devastating their account. In the above example, even after losing $500, the traders still has the remaining balance of $9500 available for trading. Let’s take a look at what can happen when a trader ignores these rules.
It should be noted that the 5% rule does not equate to risking 5% of your trading account on one particular trade. Imagine if you had 5 trades open, each risking 5% of your trading account. If all positions were closed for a loss that means you would be assuming a loss of 25% of your total account size. To put things in perspective, using the starting balance of $10,000 mentioned above, that would equate to a loss of $2,500 and only leave you with a balance of $7500! This is a scenario that every trader can manage to avoid if they apply this one simple rule.
To help traders control their risk, programmers at FXCM have created a simple indicator to help decipher how much risk is being assumed on any one particular trade. Once added to Marketscope 2.0, the FXCM Risk Calculator has the ability to help a trader calculate risk based off of trade size and stop levels. This tool is great and to help hold our selves accountable to a predefined strategy that includes proper risk management. To learn more about the FXCM Risk Calculated visit the FXCM App Store.
To contact Walker, emailwengland@fxcm.com. Follow me on Twitter at @WEnglandFX.
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As an expert in the field of forex trading and risk management, it's crucial to emphasize the significance of sound risk management strategies. In the article written by Walker England on March 15, 2013, he delves into the 5% rule, a fundamental concept in risk management for forex traders. My expertise in this area allows me to provide a comprehensive breakdown of the key concepts discussed in the article.
Firstly, the article underscores the importance of risk management as a skill that every trader should master. The central question posed is not just about stop placement but extends to a broader consideration: How much of the trading account should be at risk at any given time?
The 5% rule, as mentioned in the article, is a widely adopted practice among professional traders for managing trading positions. This rule dictates that the total loss to an account, if all open positions are closed, should not exceed 5% of the account balance. For instance, using a basic calculation on a $10,000 account, a trader following the 5% rule would limit their daily loss to $500.
The article highlights the potential impact of ignoring this rule by illustrating a scenario where a trader with five open positions, each risking 5% of the trading account, could face a total loss of 25% of the account size if all positions end in a loss. This scenario emphasizes the importance of not only considering individual trade risk but also the cumulative risk across all open positions.
To assist traders in implementing effective risk management, the article introduces the FXCM Risk Calculator, a tool developed by programmers at FXCM. This calculator, once added to Marketscope 2.0, helps traders calculate risk based on trade size and stop levels. It serves as a valuable resource for maintaining accountability to a predefined strategy that includes proper risk management.
In conclusion, the article by Walker England provides a valuable insight into the 5% rule as a risk management strategy for forex traders. It emphasizes the broader perspective of risk management beyond individual trades and introduces a practical tool, the FXCM Risk Calculator, to aid traders in implementing and adhering to effective risk management practices. As an enthusiast with demonstrable knowledge in this area, I encourage traders to incorporate these principles into their trading strategies for long-term success in the forex market.
