How much volume should you trade?

Saturday, December 1, 2012 Posted by Ayman Khlifat

There is no general rule for this, but traders should not place too much volume per trade as it may lead to a complete loss. I recommend that traders should place no more than 2% to a maximum of 5% of their capital into each transaction. This will prevent one bad trade to cause a heavy loss.

It is better to have multiple entry points in one trade then to place a big volume trade from the start. The reason for this is that plenty of time the initial trade may not be timed correctly and there will be a better opportunity to enter a bigger trade.

Here is an example:

Let’s assume that you want to sell 0.5 lots in AUDUSD at 1.0450. Instead of opening a short position at 1.0450 with 0.5 lots you would enter a short position at 1.0450 with 0.1 lots and add to that position at 1.0455 with 0.2 lots and again at 1.0462 with 0.2 lots. I would also recommend that you would place a 0.1 lots long position at 1.0455 in order to hedge the group. You may adjust the values in order to fit your trading style.

The above way allows you to minimize your floating trading losses and capture greater profits once the trade turns in your favor. Place a take profit on your long hedge at 1.0460 and place a take profit for the three open shorts at 1.0455. The initial trade will close at a loss which is offset by the long hedge which closed at roughly an equal profit. The second short will be closed neutral and the third short will allow you to have an overall acceptable profit for this group.

You successfully turned around a loss and did not have to wait until it reached your initially estimated take profit level. You were able to trade and not lock your portfolio for an unknown time until you were able to exit the trade and you did not have a loss in your portfolio.

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