August 26, 2009
Staking Plans - What's The Best Staking Plan To Use When Trading Forex?
One of the best things you can do if you're serious about becoming a profitable forex trader is to learn all about money management. This is because capital preservation is just as important as the actual system you use to generate your profits. Therefore to protect your capital you need to use an effective staking plan.
Most people agree that whenever you place a trade you should never risk more than 2-3% of your capital. So if you use a staking plan of 3% per trade and have $1000 in your trading account, for example, then you would be prepared to lose no more than $30.
I'm broadly in agreement with this. I think 3% is just about right for people new to forex trading. However you should of course have a good trading system in place before you start trading with real money.
You should also try and look for trading opportunities that if successful would give you much greater returns than your initial stake. So for instance if you were risking 3% per trade then your trading system should ideally look to take profits in the region of 6% or more. In other words if you are risking 3% of your capital using a stop loss of 30 points, then your target price should be 60 points or more.
If you want to take this one step further you can do what I do and exit your position in two stages. Regular readers will know that whenever I trade my 4 hour trading strategy, I always close half the position for around 50 points before moving my stop loss up to break-even and letting the other half run for as long as possible. That way you can sometimes achieve total returns in the region of 10% or more from a single position.
Once you have every confidence in your trading system, you can start thinking about increasing your stakes slightly. For example, if I'm really confident about a particular set-up I will sometimes risk as much as 5%, however I wouldn't recommend going any higher than this.
For the most part I think 3% is just about the ideal staking plan. Your losses are contained if you suffer a few losing trades but if you develop a winning system. then your account will grow very nicely in the long run because your stakes will go up in accordance with your trading account.