Student’s Question:I understand that the risk should be limited to a maximum of 2-5% of the account balance but how can you determine the number of positions?Instructor’s Response:Good question...Let's use the 5% figure and let's also say that you have a $5000 trading account. So 5% of that amount would be $250. That would mean that at no time when you are trading should more than $250 of your account be at risk. In other words, if all stops are triggered, whether you have several positions open or a single position open, no more than $250 would be lost.Taking the above into consideration, if each pip is worth approximately $1, you could take 1 position with a 250 pip stop (based on 5% of a $5000 account) or 2 positions with 125 pip stops, 3 positions with 83 pip stops and so forth. That is how I go about determining the number of positions that I can comfortably open relative to the size of my trading account.
Also, keep in mind that a trader need not put on as many positions as their account size will allow. If the 5% rule dictates that you can open five positions without overleveraging the account, there is absolutely nothing wrong with opening three positions or just one.The key is to never risk more than 5% of whatever your account balance might be at any one time no matter how many positions that are open.
