A Question of Capital: Risk Levels and Money Management

It is often said that Forex traders should not risk more than 2% of their capital on any one trade, but I think that risk management in Forex is very much depends on the amount of capital that a trader has.

Risk Levels and Money Management

Let’s begin at the top end of the scale – those traders who are well funded. Let’s say that a trader has a trading account of $100,000, and they hope to make some kind of annual salary to withdraw at the end of the year from their trading account. Thus they might be looking for a minimum of $20,000, which would equate to a 20% rise on their account (at a minimum). This is perfectly doable, and they might set a risk level of 1% of their account per trade ($1000), or if they are more conservative, perhaps even 0.5% of their account per trade ($500).

Risk Levels and Money Management

If you only have a bank of $10,000, then you might want to take a little more risk and up your risk levels to 2% per trade ($200). Although this is more risky and you will experience larger drawdowns on your account, as long as it is money that you can afford to lose, then this will assist you in growing your Forex trading account much quicker.

Moreover, what if a trader is under funded, and has only, say, $500 in their trading account? – Their aim is to grow the trading account as quickly as possible, and in order to do this, they need to take on more risk (to begin with at least). Therefore, they risk 5% of the account per trade ($25), and when the account reaches $1000, they continue to risk 5% of the $1000 ($50), and so on until they have a reasonable amount to trade with. Once the account reaches more than say, $3000, they then drop their risk levels to 2.5%, and continue to decrease the risk levels as the trading account increases.

As you can see in Forex you can start with any starting capital and adjust the risk you are willing to take depending on the results you get along the way.

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About the Author

AndyW Forex Trader

AndyW is the founder of AndyW LTD Forex Signals and an enthusiastic supporter of 50 Pips a Day Forex Strategy.