I'll give an example of exactly how I determine risk per trade. Since I trade spot forex and only scalp or daytrade there is very very little risk for extraordinary gap in price and zero overnight risk. This may not apply to other markets so you need to assess your own risk parameters, but this is how I do it.
example: $5000 account, day trading/scalping only, eurusd and audusd
normal stop loss: 10-15 pips.
max unthinkable gap against me: 400 pips - this is very very unlikely while daytrading.
$$ loss I'm comfortable with at the max gap: $1000 -- 20% of account drawdown at max gap.
So we calculate: $1000/400 = trade size of $4/pip
If you can average just 30 pips per week thats $120 profit each week. Very possible for experienced profitable scalpers.
$120/week @ 50 weeks = $6,000 per year (2 weeks vacation!) on a $5,000 account
These results are not only possible, but very conservative. Now if you are trading for a living multiply everything by 5 and you get a decent weekly income. This is not just bulls**t theory. I've been trading for many years. First and foremost is making absolutely sure you can survive another day no matter what happens. Easier said than done for new traders, I understand.
I would suggest a new trader who is not yet profitable only use $2/pip to preserve account size until better days.
One problem I see all the time with new traders is they are expecting to make a several hundred a week with $5000 or smaller account and anything less isn't very appealing especially after seeing all the ads for making huge $$$$. Eventually they take risk they can't handle.
I welcome any comments!
Peter
