Establishing the correct position size is difficult for most traders.  Even experienced traders screw this up all the time and it’s so simple.  Brokerages, forex trading system designers, and a number of “gurus” will tell you to risk “only 2%” per trade.  The question becomes, 2% of what?  2% of my open equity?  2% of my total account equity?  What about accounting for current risk?  All of these questions must be answered in the fixed percentage scenario.  I apply a much more advanced money management plan to intraday trading, but it doesn’t have to be that hard.

In my trend following trades, I ALWAYS figure that I’m probably wrong when I enter the trade.  That’s right.  I always think I am wrong, every time I enter a trade.  This forces me to use sound leverage.  In my trend following systems, I typically use 1:1 leverage.  That means that for every 1,000.00 in my account, I will trade 1,000 units.  To save you some figuring, that’s about a dime a pip on the majors for every thousand dollars I have in available equity.  That doesn’t sounds like a lot, does it?  What that means, however, is that for every 100 pips I earn, I increase my equity by 1%.  That becomes HUGE over the course of a year in a trend following system.  Take a serious look at my trading results before you make up your mind.  I think that when you do, you’ll see that 1:1 leverage is more than adequate to build serious wealth.

I’ll talk more about the mindset in a later post.  For now, just review your past performance and apply a 1:1 leverage to each trade.  How did you do?  Look at my performance and apply the 1:1 leverage.  How did I do in 2009?  Did I beat your fund manager, 401K, IRA?  Keep in mind that one of those pairs, a big one, was traded at 5:1 leverage!  I almost never trade at 5:1 leverage, but the stop loss was so small on the first trade that I was willing to take a chance.  I still thought I was wrong, but it made financial sense to increase the leverage.

Good Luck!

Tim