How Much Should You Risk?
But how much money should be risked? Well, to answer that most people would ask the following questions: How much of a loss is risked on a trade? How many trades are happening?
Is the principle amount of money in the account dangerously low? All of these are good questions, but there is a rule that can be followed by traders before any of these questions are asked.
A good trader knows that risking any more than 5% of the total capital in his or her account is inadvisable. In other words, a trader with $10,000 in their account should risk no more that $500 on any one particular trade.
It is also possible to calculate the appropriate position size for a trade by dividing the dollar amount the trader is willing to lose by the number of pips to his or her stop loss.
So, if a trader is willing to risk $500 (this is the standard 5%, assuming the trader has $10,000 in his or her account) on a trade with a 148-pip stop, his or her position should be EUR 30,000. The point of this is to avoid trading the entire account on a few unfortunate trades: it helps to manage the money in increments instead of lump sums, making it much safer to trade.