According to a "golden rule" no more than 2% of capital should be risked for a single trade.
Considering the above which of the following would be the best approach:
1) Position size should be no more than 2% of available capital
2) Position size can be (considerably) more than 2% of available capital, but its stop loss should be up to 2% of the same
3) Position size can be (considerably) more than 2% of available capital, but its stop loss should be less than 2% (to account for a possibility that stop loss is not guaranteed)
The first option doesn't allow for trading standard lots unless the capital is significant. For example, trading one standard lot of EUR/USD at 1:100 leverage (let's assume the rate is 1.3000) would require $65,000 capital (2% of $65000 = $1300).
I'm writing and Expert Advisor, where the user can either specify a fixed amount of lots for new trades or let EA calculate the amount of lots based on the percentage of free margin.
What do you think?
I personally don't prefer the fixed percentage rule.
The available capital will vary for a number of reasons. Like I may deposit a lump sum as working capital for the next few months. If the percentage is fixed, this would imply I have suddenly decided to increase my position sizes, which would not be true.
My preference is to control the position sizes either in absolute $/lot terms or as a function of risk/reward, and allow for a minimum amount of capital to this to be feasible.
Please note that 2% rule doesn't imply fixed allocation. It rather states that one should risk no more than 2%, which can be less than 2%.
2% is the fixed upper limit of the capital. Going back to my example of a lump sum deposit. Just because I have deposited a lump sum which is meant to last me for quite sometime into the future, does that mean I am now prepared to potentially open larger positions (because up to 2% of a larger capital is a larger position in absolute terms)? The answer is no.
Hey, but that doesn't mean others will not find it useful. ;)
I've done that already.
It is surely the way to go if U dont want to see Ur account drained quickly. Soon U'll realize that if U play wisely U can push up that 2% much higher... but remember, U must know what U r doing!
Sizing Lots proportional to the balance or free margin is simply a suicide... it all depends on the StopLoss.
Remember that what U have to fix is the amount of money that U r willing to lose on a single trade.......
I said even too much :)