Saturday, June 27, 2009

Money Management; Risk Rules

As I posted a while back, I am not going to be trading more than a single microlot (1k of currency) until I break above $50. Trading with this amount of leverage is still very risky. Currently with 16.55 in my account, trading a 1k lot of currency requires leverage of 60.4:1 (taking the entire account and not just the margin required by FXCM into consideration). Even if I were to have $25 in the account, I would still be trading with 40:1 leverage, which (if you have been following the leverage maintained by some of the currently hurting financial institutions) is tremendous leverage.

With high leverage comes lots of risk. I would like to limit the risk especially as the account grows in size. Yes, it's impossible for me to reduce the leverage at the moment without adding more to the account, but I do want a plan in place to reduce leverage as I move forward.

This is why I am waiting on a second lot until I hit $50, at which time a single lot would provide me with 20:1 leverage in my account. The second will push me back up to 40:1. While still hefty, it is much more reasonable and provides much more leeway should a trade go against me. Furthermore, and I have given this quite some thought, I will not add a third contract until I hit $100 (or the equivalent to 30:1 leverage). That may be a very long time away, but I want to be prepared as I near $50 and then $100. These precautions will help me prevent catastrophe as my account grows. Obviously, as I move forward, I will continue to reduce leverage. 10:1 sounds like a safe area for which to aim, albeit I will weigh the pros and cons as I move forward.

As always, the currency markets are tremendously risky. With large amounts of leverage you can destroy an account (of whatever size) with relatively little effort. Make sure to protect yourself from greed and from unrealistic expectations so that you can succeed.

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