Study Guide for Come Into My Trading Room - Forex Factory

MONEY MANAGEMENT 129
staring at a loss. Two percent of $100,000 comes to $2,000, 2% of
$20,000 to only $400—this is your maximum permitted risk per trade.
Trade 1: you risk $1.25 per share on 1,000 shares for a total of $1,250—
less than 2% of a $100,000 account (businessman’s risk). Trade 2: you
risk $2 per share on 300 shares for a total of $600—more than 2% of a
$20,000 account (risk of loss). Trade 3: you risk $1.50 per share on 200
shares for a total of $300—less than 2% of a $20,000 account (businessman’s
risk). Trade 4: you risk $4 per share on 1,000 shares for a total
of $4,000—more than 2% of a $100,000 account (risk of loss). Trades
2 and 4 could still be done, only with a smaller size, pushing the risk
below 2% of each account. In trade 5, without a stop, what if that stock
slides to $5, which could happen in a bear market? Busting through the
2% risk limit can damage even the biggest account.
Answer 73
Yes. Give yourself three points for choosing the right answer.
Bill plans to risk $4 per share on 100 shares, or $400, plus commissions
and slippage. The 2% Rule allows him to risk up to $500. His
trade is within the limits of the 2% Rule. Still, he is pushing it a bit. As
a beginner, he’d better stay farther away from the 2% limit. Perhaps he
could focus on lower-priced stocks and work on his analysis, entry, and
exit techniques without coming so close to the 2% limit.
Answer 74
Yes. Give yourself three points for choosing the right answer.
Since a gold futures contract has 100 ounces, a trader wins or loses
$100 whenever gold rises or falls $1 per ounce. Gary plans to risk $300,
plus commission and slippage. The 2% Rule allows him to risk a maximum
of $400. The 2% Rule allows him to take that trade. Gary is aiming
for a $900 profit, risking $300. Those are good odds, but his plan
illustrates how hard it is to trade a small account. A mere $3 move
against him puts him near the limit of his risk tolerance. He may want
to look into trading smaller minicontracts.