Where do most beginner traders fail? I would say its not knowing the pip value and not understanding risk and exposure correctly.
I hear many saying they use only 2% risk per position and are in 40% DD. ??? Well, you did never use 2%, but 40%!! There is a big difference in the margin you use, or position size, with the the true meaning of risk.
Lets see two different accounts. One with 1:400 leverage and a second with 1:1000 leverage. And both with a 1 lot position or 100.000units.
Which account is riskier??
Here many beginners will argue that account A is riskier. Well, both have the same risk! The exposure regards the account size matters, considering there are no Stop Losses or Stop Orders placed to limit the exposure. But accounts are exposed to a 10$ per pip exposure. Each pip the position goes against the entry goes 10$ in negative. On a 100 pip movement both accounts are busted.
How do you really limit your exposure to let’s say 10%?
Calculate how much is 10% of your account first. In this case this would be 100$. So you are willing to risk 100$ in case this trade goes wrong and you will cut losses at 100$ for this trade no matter what happens!
Now how far are you willing to hold to your trade? How far do you have a StopLoss or hedge order to limit your loss? Le’ts suppose 100pips for this example. Now you need to divide 100$ per 100pips and divide it again per 10$ (this is the amount per pip per lot), 100/100/10=0.10lot.
Now if you open on both accounts, with 1k equity a 0.10 lot position and you close your position at 100 pips in red, you can say that you have opened a position with 10% risk!
Failing to place a Stop Loss or Stop Order invalidates this statement and you are risking more then your initial risk on the position.
Below you can see how big should be your position according to your risk, from 1% to 5% risk and for a 5pip Stop Loss increment from 5 to 100pips.
Here you can access the sheet and change the account balance to any desirable amount.
Investopedia is also a good source of information and learning and here’s an article about “The Worst Mistakes Beginner Traders Make”
Wish you all safe Investments and a lot of success,
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