The two rules of thumb you should always apply when you buy a Forex trade
Rule of thumb #1: How much money to risk in your trade
This is probably one you’ve heard over a thousand times from me.
However, it’s a universal rule that I’ve stuck to for the last 13 years.
And that is, to never risk more than 2% of your portfolio in any one trade.
Let’s say you have a portfolio of around R30,000. Then you’ll know that with your Forex trade, you’ll never risk more than R600 (2% X R30,000).
So before you even see a Forex trade lining up, you already know how much of your portfolio you have prepared to risk.
Once you know this, you can move onto the second rule.
Rule of thumb #2: Calculate how many Forex CFD contracts you’ll trade
To explain this rule easily, let’s talk about a recent trade I sent out to Forex Trader.
I told readers to buy NZD/USD (New Zealand Dollar against the US Dollar) currency pair on 12 December 2016.
I told them to buy the currency pair at 0.7150 USD and put their stop loss (risk level) at 0.7135 USD.
So basically the only two trade levels you need to know is the:
Entry level: 0.7150 USD
Stop loss level: 0.7135USD
This means that should the trade turn against you you’ll lose 15 pips. (0.7150 – 0.7135).
Note: Pips are the smallest values in a currency pair.
Right, so to go back we have two values that we need to calculate how many CFD contracts you’ll need to buy this Forex trade.
Value #1: Maximum risk per Forex trade=R600 (2% of R30,000)
Value #2: Pips risked in Forex trade=15 pips (0.7150 – 0.7135)
To calculate how many contracts you’ll trade, you’ll simply divide the two values together.
No. Forex Contracts=(Max loss per CFD trade ÷ Pips risked per contract)
=(R600 ÷ 15 pips)
Now this is where it gets a little tricky, but it’s something you have to know.
Forex CFDs work similar to currency lots. This means that each contract you buy is worth 1,000 units.
So if you trade 40 contracts you’ll find that the minimum is 1,000 which means you’ll need to multiply it by 1,000.
So if you only want to risk 2% of your portfolio in this NZD/USD trade, you’ll buy 40,000 contracts (40 contracts X 10,000) in this Forex CFD trade.
Note: You’ll always have to pay a fee to your broker between the bid and offer spread. So if you want to offset this with your calculation, you might only want to take around 30,000 units.
Fortunately for you, the platform e.g. Pro Trader will do all of these calculations for you.
But now you know exactly how to calculate how many mini CFDs you’ll need to buy a Forex trade to not risk more than 2% of your portfolio.
Take a look below.
But every broker is different and you’ll need to play around with your trading platform…
To learn more about how much money to put into your Forex trade so you never get it wrong, then I’ll explain everything you need to know in FSPInvest.co.za’s most exclusive Forex Trader service by clicking here.
“Wisdom yields Wealth”