When making a Forex trade, the first thing you should consider is your risk tolerance. A percentage of your account balance is a more acceptable risk than money, since it gives you time to recover from losses. However, you should not use this percentage to trade unless you re confident in your trading abilities. Generally, the successful Forex traders define their risk in terms of percentages rather than dollar amounts. They also don t trade only for a short period of time or for money they need tomorrow.
To determine how much you should risk on each trade, you should first decide on a fixed dollar amount that corresponds to 1% of your account balance. If you have a $7,500 account balance, then the percentage you risk should be 1% of your account balance. While the risk per trade may change over time due to other trading variables, you should try to stick to the same percentage per trade. This way, you won t get stuck in a cycle of trading too much and losing too little.
To calculate how much to risk on a forex trade, start by calculating your pip risk. The pip is the difference between the entry and stop-loss order. You can use the 1% rule to calculate the position size for forex trades. If you re trading a currency pair, you ll want to use a small pip amount per pip. If the EUR/USD pair is $1.3051, your pip risk is one-hundredth of a percent.
Traders should be aware that Forex involves dealing with currency pairs. For example, you might go long EUR/USD on the basis of the Euro s relative value to the U.S. dollar. Obviously, your guesses could be wrong and your trade could end up being a loss. The risks in forex are much higher than those in stock market. In fact, you may even lose more money in forex trading than you made. This is because of the margin requirements.