Here’s the challenge, blindfold yourself and walk across a busy highway, if you made it across safely you earn yourself $100k. At this moment, you may be thinking it will take you 2-3 years of hard work to earn this amount.
Before you take up this challenge, think about the risks. In most Forex Trading account, brokers may offer you leverage of 1:100 or even 1:1000. The plus side, you can start your investment dream with just $50USD. Immediately, the idea of holding on to $50,000 with a $50USD comes into your mind. Keep it in your mind and never do it (Over leveraging). A $50,000 lot size reward/costs you $5 per pip. It is tempting to tell yourself I just needed 10 pips from this trade and I made $50, a 100% return in just an hour of work beating the stock market and anyone else. Making those 10 pips may be easy but the mental energy used up in monitoring the trade is way too much.
Remember Reward is always symmetrical to risks, going for the 100k challenge is just not worth it. The market just needed to move 10 pips against you and you are out. By the time the market move just 2 pips against you (plus 2 pips as spread), you are down to $10USD in your account, a 40% decrease. You are trapped in this trade thinking of holding on, in hope that it will help you realize the $100k challenge or cut it now to face a 40% loss in account. You are stuck in making a decision, your mind is in a mess, your ego is question, and you are at a lost.
Why keeping losses low is important? If you read my first post you will understand. Here’s another piece of tip:
|% Loss in Capital||% Required to breakeven based on current account value|
The table above shows that a % loss we experienced required us to pay back more. At 20% loss, we needed a 25% return. Now here’s the trick, if you have read my first post and actually measured the performance of your system, you will know whether your system is able to breakeven or not. If the answer is no, keep your losses per trade at 1% or even 2%. A 20% loss is simply too much for an average investor, you will need to beat the market indices by attaining a return of 25%.
Still thinking of the challenge? May be by night time there are lesser cars and your chance of surviving may be greater? That is true!
Understand Market Volatility: Know your battlefield
Usually at Sydney and Tokyo session, volatility will be low due to lower volume compared to the session’s overlap of Europe and USA. This means that you have more room (trade slightly bigger lot size) with your 1-2% or even 3-4% if you have decided your system capability.
Let your lot size = 1-4% risks of account value/ 2 x market volatility (ATR or Standard)
How do you measure volatility? You may use either Standard Deviation or Average True Range indicator as a measurement. This is to make sure that you take into account of market volatility while also risking just nice.
Let me sum it up by saying leveraging your reward is as good as leveraging up your risks. Leveraging slightly is not a bad idea provided that you cut your trade at a predetermined amount (1-4% of account) and also taking into considerations of market volatility. Hope you understand leveraging better now and its implications to your trading system, not to forget its application.