The table above shows how a 3% variation in risk can affect losses in the unlikely case of 15 losing trades in a row. A starting capital of $50,000 and 2% risk would lose $1,000, while 5% risk would lose $2,500. Continuing to take 2% and 5% losses on the remaining capital after 15 straight losses show a difference of more than $13,000 between the two (5% risk losing >50% after 15 losing trades). 

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Predetermined risk levels can be applied with the use of stop-losses.

 

Risk-to-reward ratio

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Strangely enough the psychology of people sees them take smaller profits (in case the market turns), and larger losses (waiting for the market to turn). We forget to pay ourselves more and quick to lock in a profit when a trade could have carried on (without being greedy). 

People often worry about calculating the risk willing to lose and forget to assess a target profit level. Proper analysis can sometimes reveal that a market has the potential to go five or ten times higher than the risk. Why risk $500 when your target profit is only $100 and accept a 5:1 against risk-to-reward ratio?

Seeking strategies returning three times more profit than risk gives traders the ability to make three mistakes before they are at square one. Whereas a plan to risk three times more than the target will only result in needing three wins just to cover one loss. Doesn’t make sense does it?

 

Respect the leverage

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Over-leveraging positions relative to the account size in order to catch higher profits is the most common way to accidentally wipe out the whole account.

Choosing how many lots to enter into determines how quickly the profits or losses come in as the market moves. The same profit/loss can be seen with a 100 pip movement on 'one lot' or a 50 pip movement with 'two lots' open. 

 

Platforms allow users to open contracts controlling $100,000 or more with only $500 margin (200:1 leverage). It is easy to understand how quickly capital could be wiped trading a standard contract with 200 times less capital required. Having under-capitalised accounts compared to their trade sizes doesn't allow for the position to breath and move around before it goes the right way. Just because platforms allow you to open certain size accounts with little capital does not mean it is smart to do so. You don’t always need to utilise the maximum amount of leverage brokers give just because it’s there.

Traders need to respect the leverage available to them. The more capital available, the higher the trade sizes can be and as a result the bigger the profits. Trading is not for those who have no other way of making ends meet, this stress can be too much. Not having enough capital is the reason a very large portion of new to market traders fail. 

Account size: $5,000

Margin used for open positions: $3,000

Profit / Loss: -$1,600 (losing open positions)

Available Equity Left: $400 ($5,000 - $3,000 - $1,600)

When there is only a certain percentage left in available equity, a margin call may be required in order to keep the trades active. If the trader decided not to put any more money in, the platform may close all the trades to free up equity, leaving $3,400 ($5,000 - $1,600) left as the balance. 

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• Understand the leverage and position sizes

• Predetermined stop-losses and take-profit levels

• Apply adequate trade sizes to the capital in the account