This segment is more applicable to forex trading due to the high amount of risk versus trading stocks. The same can be applied to stocks, but I am willing to risk a lot more in stocks so I don't use this 2% rule in stocks.
The most common formula that investors use is risking no more than 2 percent of the total portfolio value in any given trade. If you have an account with $100,000 in it and by applying the 2 percent formula, you would be willing to risk up to $2,000 in a single trade. Then you must determine the number of forex contracts you can buy without risking more than $2,000.
If you set a stop loss of 100 pips on a trade, you are willing to risking is $1,000 per contract since each pip is worth $10. (100 pip loss x $10 = $1,000). Knowing this, you can now calculate how many contracts you can purchase by dividing $2,000 by $1,000 per contract. Meaning you can trade 2 contracts. This formula determines how much you are willing to invest from your total portfolio in any single trade.
In light of this, I am going to go long GBP/USD due to one of my trading signals being triggered. Let's see how this trade transpires. Remember, if you can't trade forex you can trade FXB which is the stock version so you will want to BUY the stock symbol FXB.
Good luck trading.
JD
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