One of the most important aspects in Forex risk management is risk per trade. This factor is always determined by how much funds you have on your Forex trading account. If you want to play on the safe side and apply a solid Forex risk management than the recommended risk per trade should not be higher than 2% of your trading balance. It means that if you trade with 10,000$ deposit, you shouldn’t permit a drawdown which is higher than 2% or in cash terms, more than 200$. Maintaining this Forex risk management rule, you will basically need to be wrong 50 times in a row in order to burn your account – it is against all the statistics and barely impossible. This is the main obvious advantage of applying the risk per trade Forex money management approach.
So how do we calculate the risk? Well, actually it is very easy. In order to calculate the risk and determine the correct stop – loss and take – profit levels, you must know the PIP cost of the trade you are about to open.
There is a very simple formula for PIP calculation:
Trade size / 10,000 = Pip cost. For example: trader with 10,000$ on his trading account balance, opens 1 lot (100,000$) trade. 100,000$/ 10,000 = 10$, considering this trade size, every PIP value will be 10$.
In order to maintain the rule of 2% drawdown (200$ maximum lost) the trader should place the stop – loss level 20 pips from the market entry rate. The take – profit level should be placed a bit further then stop – loss, might be 30 pips from the entry point. This way, even if the statistics of winning – losing trades is 50% – 50%, the balance of the account will be positive because the profit will be always a bit bigger than the loss even considering the spread. As described in the following trade:
BUY 1 LOT EUR/USD at 1.35000, SL 1.34800 TP 1.35300 If the trade profits, the trader will gain 30 PIPs = 300$, if the trades will lose, the loss will be 20 PIPs = 200$.
Risk Per Trade related article: Risk-Reward Ratio in Forex Trading