1. If your new to trading use a demo account and risk 1% or your capital per trade.
2. After a good few months of a positive account then open a real trading account, not before. Why would you?
How much should I risk per trade?
Quick Answer: Risk 1% of your capital per trade including brokerage.
How do I work out how many stock CFDs I can buy or sell with 1% risk?
Use TradingLounge’s CFD Calculator to work out how many CFDs you can buy with the 1% converted to dollar risk and therefor how many CFD you can afford. Your CFD Provider may also have a position sizing CFD calculator
This CFD Calculator takes into account your Entry and Stop Loss price and Margin Deposit to calculate how many CFDs you can buy or sell. It will also display other important information.
CFD Calculator
The picture below is from a Switch Long CFD Trade as an example. With an account of $15,000 with 1% of capital risk per trade is $150 which must include commissions which you can see is $8, which would be $8 to enter and $8 to exit equals $16. So the brokers commission minus the $150 equals $134 to risk on the trade. (please note in this case I used $132 instead of $134, because if I used the $134 the brokerage would have gone up to $10.17 which would have taken me over the $150, so I stayed just under the $150 using the 132 + 16 = 148
(also note that I have placed the Reward figure in the CFD Calculator as this trade was closed out, but with the Switch CFD Trading Strategy you won’t have that figure)
Trading Capital
Why Do I need 15- 20K?
Some of the first questions we ask ourselves is how much do I need to start trading and how much should I risk per trade?
These are such important questions and are mostly overlooked, new traders that open CFD trading accounts with $1,000 are not going to be successful, CFD brokers know this and that’s why they allow you to open an account with a small amount of capital, it’s a sure win for them, they know their numbers and it is a numbers game.
For the basic money management, don’t risk more than 1% of your capital per trade including costs with an account under 30K.
I know a lot of books on trading suggest 2%, but while you’re learning – move from 2% to 1% this will keep you in the game twice as long to learn twice as much
.
Let’s say you have $15,000 to trade and your risk per trade is 1% then you can risk
$150 per trade including brokerage, as your account size grows so will your risk size, but in relation with your account size, you need a fundamental sound base to work from to stay safe from mistakes, drawn downs and losing streaks.
How many share CFDs you can buy with your $150 risk, will also depend on the distance between your Stop Loss price is to your Entry price.
The closer your stop price is to your entry price the more CFDs you can buy and further away you stop loss price will be less CFDs. TradingLounge has a calculator to work this out for you. Moving your stop closer to your entry price will give you more to buy and give you a better Risk Vs Rewards ratio, but moving your stop closer also increases the risk of being stopped out, so the right balance place for the Stop Loss is important.
The Pareto Principle
Known as the 80/20 principle
We could say 80% of your Profits from 20% of your trades
Let’s say you get a share trade signal service like TradingLounge’s or find your own trades whereby you can consistently get 50% of your trades correct.
This means, say out of 10 trades you get 5 wrong and 5 right, this is a reasonable place to start, if you’re getting 6 or 7 trades out of 10 correct then you’re doing extremely well indeed, you can also get 3 trades right and 7 trades wrong and still make money depending on your share trading strategy, e.g. keeping your risk small 1% and letting your profits run. But here we are talking about the Switch CFD Trading Strategy, so we know the risk vs reward will be less than trend trading, as the Switch is a short term CFD trading strategy
But let’s stay with the 5 wins and 5 losses (risking 1% per trade)
So 5 losing trades is going to cost you 5% of your capital that is $750 loss of your $15000 account, which is now $14,250.
Knowing your loss before you start trading is extremely important from an accounting point of view and the psychological, being unemotional and having a clear mind to make clear decisions once in the trade is imperative. The more mechanical you can be with your trading the less emotional you will be, there is nothing worse than making emotional decisions while the trade is in play.
This is how, on average your 5 winning trades will play out… that’s if you have a trading plan to keep your losses small and let you profits run.
Out of your 5 winning trades some will make a small profit then get stopped out. Some trades will break even and a few trades will actually run with the trend.
So out of your 5 winning trades only 2 of your trades are likely to run nicely with the main trend and make enough money
In reality 2 of your 10 trades will make all the money, the 80/20 principle here and simply say you will make 80% of your money out of 20% of you trades and by keeping your losses small and letting all your trade run. Risk 1 % per trade of your capital and have a trading plan to allow the market to run, as many traders take profits too early
Drawdown
is another aspect you need to understand, this comes into play from the more trades you do and it’s a natural occurrence and you need to build it into your trading business plan, so your losses don’t get out of control. It can also be referred as the losing streak, if you do enough trades you will run into it, its where you have a large number of losses in a row. Say 9 or 12 losses in a row, if you stay within the 1% then your overall account could drawdown 9 – 12% If your risking 2% or more you can quickly start to see how your account could have 50% drawdown. There is actually a mathematic equation for the losing streak;
Losing streak
LS=LN(#of trades)/-LN(probability of a losing trade) Where, LS=Losing Streak LN=Natural Logarithm
Win% loss in a row
30 30
35 25
40 21
45 18
50 16
60 12
70 9
80 7
90 5
Example: So getting 7 trades right out of 10 would still give you a losing streak of 9 at some point.