Daily Price Action
Shares

How Much Simultaneous Risk Should You Tolerate?

Shares

forex-risk

Happy Friday!

This week’s question comes from Maanda, who asks:

I would like to know the percentage of your open trades compared to account value? In other words I want to know how much you would normally trade if you had a $1000 account? Do you have a limit or you open trades as opportunities happens?

There are a few ways I’d like to address this question because it raises some interesting observations.

Also, what we often read in the books or elsewhere online doesn’t always hold true. It always sounds good until you try to implement it into your trading.

I’m mostly referring to rules like risk 2% of your account balance. Or, only open a maximum of three positions at one time.

You will receive one to two emails daily. See our privacy policy.

Those are incomplete statements and to be honest, they can get you in a heap of trouble if you aren’t careful.

Let’s begin.

Don't Focus on Making Money

Before we dive into the nitty-gritty, I want to cover an important concept.

Usually when I say “don’t focus on making money,” the response I get goes something like this…

But Justin, how can I expect to become a profitable trader if I’m not focused on the money?

There’s your challenge. If you can learn to separate the money from trading, you stand a MUCH greater chance of succeeding.

Of course, you need rules like how much you should risk at one time, but focusing on this too much can be problematic.

Here’s why…

Today’s question is about how much capital I’m willing to risk at any given time. In essence, this trader wants to know my risk tolerance.

What if I said my rule is to have no more than 6% of my account balance at risk at any one time? (this is not my rule, by the way).

Now let’s assume I risk 2% of my balance per trade. This means I can open a maximum of three trades at one time without overstepping my boundaries.

This is a terribly flawed approach.

Why?

Because traders who think this way are focusing on the wrong thing. They’re focused on the quantity of trades taken rather than the quality.

And contrary to popular belief, more trades does not necessarily equal more profits. In fact, I’ve found the opposite to be true.

When you set a rule like this, what you’re really telling yourself is – let me go look for three trades right now.

At least that’s what most traders do. I know because I was once in those shoes.

If you give yourself this kind of freedom to open trades, chances are you’ll take full advantage of it. And that may not be such a good thing.

You have to let the market come to you. Only it can dictate how many favorable setups are offered each week, month and year.

And if you try to force its hand, it will bite you.

Okay, So How Much Should You Risk?

Now that we’ve covered the idealistic side of things, you’re probably wondering how much simultaneous risk I take on at any one time.

The truth is I never have this issue. This is because I’m extremely selective about the setups I take.

Sure, I have a rule, but it probably isn’t what you’re thinking. You’ll see what I mean shortly.

If you’ve followed me for a while now, you know that I typically only trade four to maybe ten times each month. So the odds of having exposure on more than one or two setups at a time is pretty slim.

But if I do run into this dilemma, I always keep my risk within acceptable limits.

That may sound a bit obvious, and it is, but here’s a question where a lot of traders get tripped up.

How much risk can you tolerate?

Most traders I speak with don’t have an answer, at least not right away.

The rest of the conversation usually goes something like this…

Trader: I risk 2% of my account balance on each trade

Me: And how much is that?

Trader: Well, it’s 2%

Me: Right, but how much money would you lose in the event of a total loss?

Trader: …I’m not quite sure

Usually, after a moment of silence, they come up with the answer. But not knowing right off the top of their head is an issue.

Having a rule defined as a percentage is important, but it’s just as important to know how much money is at stake.

After all, it’s the loss of money that triggers the emotional response. The percentage alone is meaningless.

Once you’ve figured this out, determining your simultaneous risk across all open positions is easy.

Keep it simple and be sure to choose numbers you’re comfortable with. If a percentage or dollar amount gives you the slightest bit of anxiety, lower it and keep lowering it until the anxiety disappears.

Emotions are the number one killer of trading accounts, and they always come into play after a losing trade.

Reduce your risk, reduce unwanted emotions.

A Two-Part Solution

trading-solutionOpen exposure is never static. It’s always changing as the market ebbs and flows.

For instance, let’s say you have three open positions. Only one is in profit, and you’ve covered your risk entirely by trailing your stop loss.

The other two positions are relatively new. Each one carries a 2% risk (of your account balance) for a total risk of 4%.

Just two days later, one of those two trades is in profit by a considerable margin. You’ve trailed your stop loss, so you’re now left with exposure from just one position.

As the market ebbs and flows, so too will your exposure.

Now, the key here is to define a single maximum amount you feel comfortable risking. But just like I mentioned above, that figure should be represented as both a percentage and dollar amount.

Let’s assume for a moment you’re trading with $10,000. You’ve decided that your maximum simultaneous risk is 5% of that amount.

However, after thinking about it, you aren’t so sure you’re comfortable risking $500 at one time.

All of a sudden that seems like too much money.

See how a measly figure like 5% can take on a whole new meaning with a dollar amount next to it?

With this new information, you decide to drop it from 5% to 4%. Not a huge percentage change, but that 1% reduction just shaved $100 off your maximum exposure.

So there you have it. The most exposure you’re willing to take on at one time is 4% of your account balance or $400 if using a $10,000 account.

Remember to write it down this way too. Having the dollar amount next to your percentages is essential to accept the risk fully.

At the end of the day, it’s about finding what works for you. The numbers in this post are just examples so be sure to test various approaches as you progress.

What's My Rule?

My rule for taking on simultaneous trades is simple. That’s because it’s the same as my risk per trade.

You see, I don’t have a separate rule for exposure from multiple positions. The rule I use on a per trade basis is the only one that matters to me.

If I’ve set my per trade rule in a way that prevents unwanted emotions from cropping up, why would I want to take on more risk at one time?

It just doesn’t make sense to me.

Does that mean I’m limited to one position at a time?

Not necessarily. As we just discussed, exposure is dynamic, never static. So if I want to take on additional exposure, I need to cover some risk first.

If I’m unable to do that, then I’m forced to sit on my hands, and I’m fine with that. It’s better to have one well-managed position than three mismanaged ones.

This approach won’t work for everyone. And that’s okay. It just happens to fit my views and style of trading.

Final Words

Start letting the Forex market come to you and try to avoid setting a rule for the maximum number of simultaneous trades. It will be too tempting to max out that number, which means you’ll be focusing on quantity rather than quality.

What matters is the process. Identifying key support and resistance, trend analysis, favorable risk to reward ratios, confluence, etc. These are the things that matter.

If you’re trading from the higher time frames (4-hour and daily charts) and being selective, the number of trades you take at one time shouldn’t be an issue.

If it becomes a problem, you’re likely overtrading.

Send me weekly updates about Daily Price Action's Q&A

Your Turn: Ask Justin Anything

I’d love for this new weekly Q&A to be successful and provide an invaluable repository of answers to common Forex questions.

To do that, I need your help.

Here’s what you can do to get involved and have your question answered in next week’s post:

  1. Ask questions. Post them in the comments below or Tweet them to me @JustinBennettFX
  2. Help me answer questions. If I missed something or if you have something to add, don’t hesitate to leave a comment below.

About the Author Justin Bennett

Justin Bennett is an internationally recognized Forex trader with 10+ years of experience. He's been interviewed by Stocks & Commodities Magazine as a featured trader for the month and is mentioned weekly by Forex Factory next to publications from CNN and Bloomberg. Justin created Daily Price Action in 2014 and has since grown the monthly readership to over 100,000 Forex traders and has personally mentored more than 3,000 students.Read more...

follow me on:
  • john says:

    Thank you for the article. Very enlightening especial the Dollar Amount.
    Regards.
    John

  • Basil Croeser says:

    How do we select which pairs, indices, commodities or shares to work with? In other words which instruments are worth consideration for being most likely to satisfy Justin’s Pin Bar requirements?

  • Fabio Ramirez says:

    Justin, your comments are well taken. Your are reinforcing a good point, focus on protecting your capital and the profits will follow. Thanks for explaining the value of the 2% rule.

    • Fabio, absolutely! It’s all about capital preservation. Let me know if you have any questions along the way.

  • Chris Eagle says:

    Hey Justin,yes you are correct in all that you say except in one thing…why would one even bother trading if the rules are to trade only 2 or 3 percent of your account with only $1000 capital.
    I use the art of compounding…similar to a martingale method…in other words have a system that works 3 times out of 5 trades so if you lose then you simply risk a higher amount on the next trade to make up the original steak that you risked on the first and the second and sometimes the third trade entry so in reality you are making 100 percent. Ive grown a $1000 account into 27,000 in one year this way.So for example if one is happy to risk $500 then on a $1000 account you risk $150 to on your first entry then increase it to $300 and so on …Still picking at least a 2 to 1 or 3 to 1 risk reward setup so your profits are then accommodating the method comfortably. There is no other reason i can think of to be in this game other than to make money..its not like a normal job where you have to serve customers at a retail store or build furniture with your hands. Job satisfaction is seeing your account grow.Its a game of strategy with numbers and graphs. plain and simple . win some ,lose some but win more. It works but you have to apply a set of rules and stick to it or it goes just as quickly if not faster than it took to accumulate . I learnt that too . takes hours of practice like playing poker. most certainly a game of patience to say the least. I certainly advise to pick your trades wisely and only the ones that offer the highest probability or its going to end in tears to take on what ive suggested. but its a way to make money without having a big pot and you tend to be far more disciplined when you know it has to be right or your account will blow up. whereas trading 2% you will gamble it away with loads of hit or miss trades.Thats my take on it from my own experience..comments are welcome. happy trading, Chris

    • Chris, it’s more important to learn the rules and develop discipline than it is to make money when you’re just starting out.

      Also, if you’re using martingale method, it’s only a matter of time before you blow the account. It may work for a few months or even a few years, but the end result is always the same.

  • Sandeep says:

    I agree with Justin completely on trading quality setups rather quantity. Tho at times them quality setups do come in quantities too. For example, i had like 17 – 25 open trades at any time during the month of January 17, simply because i was finding tradable setups in almost every currency pair. then came february and after the first week i had only one open trade for the entire month. And honestly speaking, after a few days i did grow impatient and went about opening a new trade only to close it with a loss eventually, lol. So, there you go, Justin’s point proved again. It is always better to keep your patience and trade only when a real tradable setup is spotted rather jump gun on every candle. I used to trade the hourly charts before, but now i only trade 4 hr and daily and that does help me control my urge to overtrade.

  • Cooper says:

    My question is difficult to phrase, but here it is. I like to maintain a demo account as well as my live account. when I cant pull the trigger on a trade I go to my demo and enter it there. Gets it out of my system and I can watch it (and hopefully learn from it). However my demo account is growing and my live account is dropping.. FAST! I did have my first profitable month (month to month) in February and that was after switching to 4h and daily time frames and focusing on price action/support &resistance. I just cant seem to makes sense of how the trades that Im entering are different. Obviously I should be trading the trades that Im sending to the demo but I just cant get my brain to let me enter those trades. How would you recommend making that connection?

    • Cooper, thanks for sharing. It sounds like you’re wondering how to make the jump from demo to trading live?

      I’ll add this one to the list. There are probably a ton of traders out there who could benefit from the answer. Cheers.

  • Francis says:

    Thanks for that insight. It much knowing the dollar amount involved with regards to the risk.
    Warm greetings .
    Francis.

  • >
    Get 40% Off Lifetime Access to Justin's Forex Community - Ends August 31st!
    close

    33,000 Forex Price Action Traders and Growing!

    Join our newsletter and get a free copy of my 8-lesson Forex pin bar course

    You will receive one to two emails per week. See our privacy policy.