It is vitally important to trade within the limits of your trading capital. Like everything else in this world, a lot of bullshit is written about money management. The most common is that you should not risk more than 2% per trade. This has become so widespread that nobody has stood back and seen how patently stupid it is! I believe it rose to popularity (and even entered the collective unconscious of humanity) because sellers of dubious software wanted to make sure that their gullible clients didn’t lose all their capital before the refund period ran out.
Think about it – even without allowing for diminishing trade sizes as your money dwindles, that’s allowing for 50 consecutive losses! My god, if any of our software had to withstand that many losses in a row, we would be totally
ashamed… our software has quite a high capital requirement because we could be trading several contracts at any one time some with quite large stops if trading the daily charts. Even at the minimum 0.1 contracts – that means we need the capital to trade maybe 0.5 contracts and suffer a loss of 500 pips – or $500. For this reason, I would say the sensible minimum is $2,000. On that basis, a single trade risking 140 pip loss would be 7% but since we may have three trades open at any one time (unusual) the figure is closer to 20%. A safer minimum would be $3,000 per 0.1 contracts.
I would say that it is possible to start with just $1,000 if we don’t open more than one trade at a time. Of course, the capital can be easily reduced to $300 if we trade the micro contracts offered by some brokers such as AvaFX.
Never fall into the trap of increasing your contract size after a loss or two. Losing money is part of trading – you have to swallow loses and carry on regardless. Don’t let your emotions mess up your trading career. Always, always, always think of trading as a long-term career and not as a get-rich quick gamble.
Nobody ever became good at his or her job overnight. It usually takes years! Trading is no exception but the difference is that a bad worker still takes home the same paycheque – a bad trader loses money. This means that you need to make an extra effort to learn fast rather than to make money fast. To do this, you should demo trade until you know what you are doing. Don’t jump in the deep end and risk real money unless you are already a good trader. Demo trade for at least three months and treat it as it was real money – discipline yourself.
Then, even if you are rich, start trading with just the minimum 0.1 contracts until you have proven that you make a profit. Only then should you increase your contract size. Remember, this is a long term business that can make you financially independent and, like me, live the dream anywhere in the world…