MANAGING RISK THROUGH POSITION SIZE

                                   Managing risk is all about controlling the amount of money you lose when
a trade doesn’t go your way. Many traders make the mistake of sizing their
positions too large and losing more money than they should on a single
trade. To determine position size, you first need to decide how much money

as a percentage of your account you are willing to lose on a single trade.
The amount varies for every trader, depending on the amount of risk the
trader is willing to take on, but generally speaking, 2 to 5 percent is a typical
number. The more money you risk on each trade, the faster your account
will be damaged if you lose more than one trade consecutively, as demonstrated
in Table 4.3.

Table 4.3 illustrates how dramatically a $10,000 account can be damaged
after 10 consecutive losing trades. The trader who sized his losses at
2 percent lost 18 percent; the trader risking 10 percent per trade lost 65 percent!
Sizing positions to ensure that you do not lose a tremendous amount
of your account during a streak of bad trades is essential to your survival.

For example, assume that you have a $20,000 account and you are willing
to risk 3 percent of the account, giving you $600 to risk on a single
trade. The trade you are considering requires a stop loss of 75 pips on the
EUR/USD, and you are trading mini lots. Assuming that your leverage is set
at 100:1, the value of a EUR/USD mini lot pip is $1. To size this position, use
the calculation as shown here:

                         ($20,000 × 3%)/(75 ∗ 1) = 8
Using this calculation, we have determined the proper position size for
this trade to be eight mini lots.

Supercharging a Small Account
Position sizing to keep risk around 2 percent per trade may work well with
a $20,000 account, but what if you only have $500? If you consider that
2 percent of $500 is only $10, it doesn’t leave you much risk capital to
work with. Micro accounts are a great place to start if you have only $500.
With micro accounts, a $10 risk will usually fit your position into a 100-pipstop loss, which is sufficient for almost any trade. The problem with micro
accounts is that your gains will be less than exciting. Let’s face it: When
you trade micro lots, even if you averaged 100 pips a week, you have only
earned a profit of $10 per lot. Those 10 bucks represent a great percentage
return on your money, but when you’re trying to grow $500 into $20,000, it
is going to take a while.
I suggest supercharging your account growth by determining a
monthly budget you are able to spend on trading and adding it to your
micro account on the first of every month. The amount doesn’t have to be
a lot—perhaps $100 to $500 a month, whatever your budget can afford.
The point is to supercharge your gains while smoothing out any losses you
sustain, to accelerate your small account’s growth into a bigger account.
Think of it like compounding interest. If you average 5 percent a month
but are adding $100 to your account every month, you’ll have gained more
than you would have only booking the 5 percent each month. This is because
each month that you add money to your account, the option of trading
more lots is available. While you’re supercharging your small account, I
recommend adjusting your trade size every couple of months, too. This is a
very simple but very effective method for growing a small account quickly,
as long as you have already demonstrated the ability to trade profitably on a
demo account. The effects of supercharging a $500 account can be seen in
Table 4.4. The effect of depositing an extra $100 a month into your
account can be dramatic. In a year’s time the supercharged account grew

276 percent, whereas the nonsupercharged account grew only 19 percent.
The extra monthly deposit helped smooth losses and increase gains each
month to grow the account 14 times faster than trading alone. This sample
used a randomized rate of return for each month for example purposes.