Risk Management

Maximum Risk per Trade - It is recommended that you do not risk more than 5% of your account per trade. So if you have a $1000 dollar account then don't risk more than $50 on a single trade. You may feel comfortable risking more of your money, but remember the more you risk the easier it is to loose your whole account balance.

e.g If you are risking 20% of your account per trade and you have 5 trades if they all loose you will have nothing. where as if you were risking 5% you would have to have 20 trades all loose before you had nothing.

The Key to trading capital preservation, if loose all of your capital then you wont have any way of making it back.





 
Maximum Account Usage -  It is recommended that you also don't all of your account funds at the same time as you will need to leave some money in there for margin. depending on your gearing level around 50% should be fine. you can choose more or less depending on your comfort level. At 50% if you have a $1000 account you would still have $500 to trade with and $500 there as your margin protection.

Stop Losses -  It is recommended that stop losses always be used when trading, this will limit your risk to the difference between the market value and the stop loss. But stop losses should not be set too close to the market price because you may be stopped out due to regular swings in the underlying security values. A good starting point for a stop loss would be two times the average trading range over 5 days.

Trading Plan -  To become a successful trader you will likely need to create a trading plan that details how you will trade, what you will trade, and the conditions that will cause you to enter or exit a trade. By following a trading plan you will be less susceptible to making emotional decisions (such as removing your stop loss because you KNOW the price will go back up, even when its continuing to fall).

Maximum Drawdown -  Drawdown refers to any decrease in your investment balance from peak to trough. The maximum drawdown is the largest drawdown experienced by a strategy over a period of time. As an investor you have to determine what loss you are comfortable with and adjust your trading strategy accordingly. If you cannot handle a drawdown of say 20% then you must reduce the amount you are risking per trade.

Its important to let your winning trades run and cut your losers quick.