Lot sizing and money management for beginners
We’ve all heard that we should risk a maximum of 2 to 5% of our capital per trade. While that is true if you’re a seasoned professional trader, recounting my own experience, the beginner should risk much less when starting out.
From my own experience, risking even 1 to 2% was too much for me when I first began trading live. My thoughts were still on whether I was going to win the trade, or how undesirable it would be if I lost the trade (losing 1% of my capital in the process).
It took my awhile to realise, that as long as I’m having such thoughts, it means that I’m still risking too much per trade!
Once I started trading 0.1 lots per trade, my mind started to ease. I didn’t really care whether I won or lost the trade. I only wanted to make sure I planned my trade and executed it according to my plan.
Rationale behind trading VERY small
When we are starting out, we aren’t very confident of our trading skills and strategy. This is already a very big burden, so we need to reduce other types of stresses, such as risking what a professional trader would normally risk per trade (2 to 5%).
As a beginner, its best you trade 0.1 lots or 0.01 lots per trade when you are first trading live. You will find yourself much more at ease and at peace.
The idea is to increase the lot size gradually as you become more and more consistently profitable. If you find that you’ve made decent profits in the first month, move up to 0.02 or 0.2 lots. Then if you are satisfied with your progress in the second month, try 0.03 or 0.3 lots for the third month.This way, your mind is not subject to a barrage of emotions.
You will need to record your daily P&L and pips gained in an excel spreadsheet to keep track (example below). Don’t just rely on the MT4 account history or myfxbook. Recording your own P&L makes you feel more serious about this whole trading business.
Comments and questions are welcome. Good luck with your trading.