You’ve probably heard it a million times by now that you should only risk 1% or less on every forex trade you make.
Some might say “Sure, but if your strategy is a winning strategy anyway, what difference does it make to risk 1% or 5%? Your win-rate still remains the same.”
That is true to some extent.
But there are a few disadvantages to using a larger position size as compared to a small one.
The most obvious one, of course, is that by using 1% you can survive a longer string of losses. If you’re risking 5% per trade, you’d be in dire straits if you hit say 10 to 12 losses in a row.
If you’re risking 1% per trade, even if you lose 12 trades in a row you’re still left with 88% of your account intact.
If you’re risking 5% per trade, when you lose 12 trades in a row you’re now left with only 40% of your account.
Additionally, a larger bet size tends to bring about the following “mistakes”:
- Makes you feel too emotionally invested in the trade since the stakes are higher (i.e. you’d feel much more pain if you lose the trade).
- Makes you set a smaller-than-intended take-profit target because you want to cash out the profits as soon as possible before the trade goes south. (For example if your strategy is meant to take profits at 2x, you may set only 1x for this particular trade because the stakes are too high.)
- Makes you cash out the trade too soon because you are simply too anxious about the trade. (For example, if your intended risk-to-reward ratio was 1:2, you may decide to just cash out at 1.75x profit because you’re not prepared to wait for price to hit 2x and you’re too fearful of the trade going south.)
- Makes you increase your stop-loss if the trade starts to threaten your stop-loss level, because you simply can’t bear to get stopped out on such a big trade.
The four mistakes above can easily screw up what is supposed to be a profitable and sound trading strategy, because you start to go off-script by cutting corners and short-changing your projected profits, and it will cause you to be far less profitable than initially expected.
And for all the reasons listed above, I feel that all trades should always be 1% or less.
Trust me, I’ve done the whole “large position size” thing many times, and it almost always never works out, and that’s why I speak from experience.