Although 1% is a great place to start, sometimes it is not that straightforward. For example, what if you are a little over ambitious with your initial deposit amount. Could you be risking too much. The 1% rule assumes too much. As we all know, trading forex is 80% psychology and 20% technical ability. So, keeping yourself in a sound frame of mind even after sustaining a string of losses will put you in a significant psychological advantage and allow you to carry on.
So, there is a better idea. Find yourself a dollar amount that you are comfortable losing. This is called the psychological amount.
Step 1:
You need to know the maximum potential for drawdown. Let's say to be safe, there is a maximum potential of having a drawdown or a string of losses of 10 in a row. We need to find an amount that we are comfortable losing in the worst case scenario of 7 to 10 losing trades in a row.
Step 2:
How much are we willing to lose? Let's say you have a string of 10 losing trades. What would be your maximum drawdown amount that would allow you to. Is it $5,000 or $10,000. It depends on the trader, but think of an amount that you are willing to lose.
Step 3:
Divide that amount by 10. Let's say your account balance is $23,500. The risk based on the 1% rule is $135. Maximum drawdown is $150. Dividing this amount by 10 gives us the psychological amount, which is $150. It is important that you find an amount that suits you personally.
Setting up for success:
Always focus on how far you have come, rather than how far you have left to go. Take the time to work out what you are comfortable in losing and possibly adjust your trading account size and risk based on that figure.