Above is an important illustration that will outline the difference between risking 2% of your capital per trade compared to risking 6%.
If you happened to go through a 10 trade losing streak, you would have gone from starting with £20,000 to having only £11,459 left if you risked 6% on each trade.
After 10 losing trades you would have lost over 40% of your account.
If you were more conservative and risked only 2% of your account per trade, you would still had £16,674 which is only a 17% loss of your total capital.
- 10 trades at 6% per trade would mean a 75% increase is required to get back to breakeven.
- 10 trades at 2% per trade would mean a 20% increase is required to get back to breakeven.
The point of this illustration is that you want to setup your risk management rules so that when you do have a drawdown period, you will still have enough capital to stay in the game.
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This is true, however it depends on how your plan is set.
For example at target 1 would you take off half of your position and let the remaining run?
Again it would all depends on what kind of strategy you are using, is it harmonic patterns or structure support?
If you are trading harmonic patterns you usually get 1.5:1 if not more depending on how deep the patterns complete on the Fibonacci.
If you are trading support and resistance most trades give a better than a 1:1 risk reward ratio.
Many traders make the mistake of letting there losing trades run and cut there winning trades short, try not to be greedy but squeeze the pips out of the winning trades and cut the losing trades short.