Many asked me about the 5% rule I said in previous post. Let's get some clue from simple examples.
In short, this is just some analogous version of the notorious doubling strategy used in option trading. In forex market, there could be some sudden move which is highly unpredictable and contradicted to long-term trend. Mostly, such move would be controlled within 2% range, which, take EUR/USD as example, is some 200-250 pips move. That is to say, given a 100 margin ratio, you are going to be eliminated if your position is over half of your asset (I mean the margin you use). What's more important is such move usually happens in less than 5 minutes, maybe without even a look back. For guys like me who can't concentrate on the market all the time, such move is deadly.
So taken the famous Fibonacci rule, there might be a 30% correction before next major move. So make it safe, let's say 20%. Then if we assume you only buy before the move and at the bottom of the move, an asset allocation about 1:4 would be appropriate. Still in pursuit of simpleness, let's just divide it by two to reflect your risk attitude. That's 5%.
Of course this analysis is too naive. In practice there are tons of variations to reflect your own strategy and risk tolerance. For me, I would use a 1% per trade at most. And what's more important than this in trading is some other principles like strict stop loss, macro analysis, etc. Anyway, the risk control of this means should be appriaciated.
In short, this is just some analogous version of the notorious doubling strategy used in option trading. In forex market, there could be some sudden move which is highly unpredictable and contradicted to long-term trend. Mostly, such move would be controlled within 2% range, which, take EUR/USD as example, is some 200-250 pips move. That is to say, given a 100 margin ratio, you are going to be eliminated if your position is over half of your asset (I mean the margin you use). What's more important is such move usually happens in less than 5 minutes, maybe without even a look back. For guys like me who can't concentrate on the market all the time, such move is deadly.
So taken the famous Fibonacci rule, there might be a 30% correction before next major move. So make it safe, let's say 20%. Then if we assume you only buy before the move and at the bottom of the move, an asset allocation about 1:4 would be appropriate. Still in pursuit of simpleness, let's just divide it by two to reflect your risk attitude. That's 5%.
Of course this analysis is too naive. In practice there are tons of variations to reflect your own strategy and risk tolerance. For me, I would use a 1% per trade at most. And what's more important than this in trading is some other principles like strict stop loss, macro analysis, etc. Anyway, the risk control of this means should be appriaciated.
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