How Much Should I Risk for Each Trade?

Different traders are going to have different goals and will differences in how much risk they are willing to tollerate.

My rule of thumb is to risk between 1% and 3% of my account for any given trade if I am trading conservatively, and between 3% and 5% if I am making a more aggressive trade.  I might make a conservative trade when I am trading against the trend, and an aggressive one when I am trading with the trend.

One way of putting the amount of money risked into perspective is to put it into terms of how many consecutive losing trades an account could tolerate. 

If I made exclusively conservative trades, I would be able to make between 15 to 50 losing trades before my account would be down 50%.  If I made exclusively aggressive trades I would be able to make between 10 to 15 consecutive losing trades before my account would be down 50%.

Now obviously I do not want to be anywhere near being down 50%, but if you are a good, educated, knowledgeable, and most importantly, unemotional, trader who takes smart, calculated risks (almost impossible for newbie traders, and still very difficult for even experienced traders to achieve), this outcome becomes much less likely.  I like to have that perspective in mind though, because it lets you know just how far you are away from a worst-case scenerio, and one traders always need to be aware of.

Here is a little chart to help you see just how much I might risk per trade depending on the size of my account:

Account Balance:          Conservative Trading Strategy:   Aggressive Trading Strategy:
$500                               $5 to $15 per trade                      $15 to $25 per trade
$1000                             $10 to $30 per trade                    $30 to $50 per trade
$2000                             $20 to $60 per trade                    $60 to $100 per trade
$5000                             $50 to $150 per trade                  $150 to $250 per trade
$10,000                          $100 to $300 per trade                $300 to $500 per trade
$20,000                          $200 to $600 per trade                $600 to $1000 per trade

A note to the newbies out there:  Opening up an account with just $500 means that you would be smart to want to keep the amount you are willing to risk between $5 and $15 per trade.  In order to be a successful trader, you would have to pick the perfect entry point in order to make a successful trade.  In addition, you must take into account that a trade for most major currency pairs will cost you at least $5 if you are purchasing mini lots ($10,000).  That means that you have to get the PERFECT entry in order to keep within your risk tolerance range.  Nailing that perfect entry point when a currency is at it's lowest point before moving up, or it's highest point before moving down, is virtually impossible.  You are more likely to win the lottery or get struck by lightening. 

One thing you might take away from this is that forex trading does require a moderate investment.  With a $500 account balance, a trader will be compelled to risk 10% or more of his account balance in order to give themselves a modest price range in which to purchase a currency.  This, however, leaves them exposed to losing their entire account balance.   Risking 10% on a single trade, going back to that worst case scenario, means that after 5 consecutive losing trades your account will be down to 50% of what it was originally, or that your balance will be $250 instead of $500. 

Once your account gets down to this level, you are at risk of not having enough money to make a trade.  Every trade requires a certain amount of "margin", or money in your account in order to place the trade.  It's not unusual for most currencies pairs to require a margin of approximately $100, and for some commodities, such as silver, it can require a margin amount in the neighbourhood of $200.  If your account is down to $250 you barely have enough money to place a trade.  If you click the "Buy" or "Sell" button in this scenario a window will pop up telling you that you have insufficient margin, and the trade will not go through.

I know that some traders want to get into Forex, but don't have $5000 in capital to invest.  If you are opening up an account with a minimal amount of capital, you would be wise trade as conservatively as possible, and realize that the risk actually increases because the chances of entering a position within 5 pips of the price going in your favour is highly unusual.

Best of luck traders.