[jason]

Hi David,

I've been watching your video series on money management (which are great by the way) and I have a question:

You mention that as a general rule you should try not to risk more than 2% of your capital on each trade. If I open a trade which has a stop loss at 2% of my initial capital does that mean i can't open anymore trades? Or I can open as many trades as I want but make sure they each have a stop loss of no greater than 2%?

I know that say two trades add up to 4%, but if you're trading different currency pairs then the risk is spread wider.

[David Waring]

Hi Jason,

Welcome to the community that's a great question you have raised.

When people say don't risk more than 2% they are normally referring to per trade. Most traders however will also have a maximum amount that they are willing to risk in the market at anyone time in addition to this however, which is often determined by how correlated the instruments are that they are trading.

So lets say for example you are trading long EUR/USD and Short USD/CHF and risking two percent on each. These currency pairs have such a high negative correlation (meaning that they move almost exactly opposite one another) that this would essentially be the same as having 1 position on where you were risking 4%.

Below is a link where you can find correlations for the different currency pairs if you would like to take this into account when determining the maximum you are willing to risk on all positions.

» Correlation table Mataf.net

Hope that helps. As always if there are any other questions or comments on this one please feel free to post them below.

Best Regards,
Dave

[jason]

Thanks for the link.

I've been trading both the AUD/JPY and AUD/USD and did notice that their charts were remarkably similar. Now I will trade with correlation in mind as to minimise risk per trade.