accounting forex
Is it true that true that you should limit any one trade to 2-5% of your forex account?
I’m going to check out some books from the library, but could any knowledgable investors shed some light? I don’t mean to be lazy but I have a lot of my mind + by helping one person it helps everybody. (Atleast those intested in trading.)
The name of the game in forex is Capital Preservation. Let’s say that on Friday, you bought the Dollar against the Yen (USDJPY) in a standart $100k lot on 1% margin – that’s an investment of $1000 from your account. Here’s a chart: http://forex.tradingcharts.com/charts/index.php?sym=USDJPY&data=b&tz=GMT&type=b&cs=1&period=1h&defdates=1&bmonth=Mar&bday=9&byear=2007&bhour=13&bmin=25&emonth=Mar&eday=9&eyear=2007&ehour=13&emin=&Img+Type=png&drsi=0&ma1=0&dmacd=0&ma2=0&bol=0&dstoch=0&Submit=Submit
At 8:30am (EST) the US Unemployment numbers came out and the dollar rose to 118.2 Yen from 117.4 in less than 1 minute. It’s likely that price gapped and even if you had a stop in place, the best available price may have been well above your stop price. Let’s say your stop was executed halfway through the rise – 118.6 Yen. That 0.4 Yen rise would have given you a loss of roughly $340 – over one third of your investment.
If you limited your trade to 3%, that would have been a 1% loss of your entire account. If you had traded 30% of your account, you would have lost 10% of your entire account in that one trade.
It’s great if you had bet on the dollar going up but not so good if you bet on the dollar going down. People that bet big trying to strike it rich invariable wipe out their account quickly. The idea is to survive a bad day to be able to come back and try again the next.
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