The markets have been extremely choppy and will likely remain that way until the Treasury's rescue package is either approved and implemented, or if the package is less than what the markets are hoping for, or worse not approved. So in the mean time, I am keeping my risk pretty tight on any little positions, and also using this time to address the pile of paperwork on my desk that has been building like our national debt.

I received numerous emails about my reference to my trading “units” and position size on trades. First let me start off by saying that I am not your personal finance advisor. I cannot tell you how to handle your trading account. What I can do is lay out some risk management guidelines for you to consider. And as I've said in the past, managing risk, especially in our current markets, is the name of the game.

I will start off by explaining how I manage my position sizing. As may you know, I and a group of other colleagues trade GAIN's managed accounts. The funds are pooled into a single account that accessed by myself and the other traders. So I don't have a trading account with a fixed dollar value. What I have is a monthly loss limit. So I am unable to say I risk X% per trade. The way I handle my position sizing is by breaking it into units. The largest position I am able to trade is three units. Because our “units," or lots, are a certain size, we have the ability to break them into half units, or lots. I don't often, I have the ability to size a trade in one of six position sizings -- either a half unit, a full unit, a unit and a half, two units, etc. The reason I would trade in a half unit is if the trade requires a very large stop loss. Normally we trade with 25-35 point stop losses, but like our idea to short EUR/USD into 1.4920 with a 100-point stop loss, I am only doing a half unit here. The time I would trade one and two units is under normal trading circumstance. Three units are used when either the stop loss is small, or when I really, really like the trade and am willing to risk a normal stop loss size.

Now, how can an individual trader use this information? Let me put in terms of the mini-account. At the minimum a mini-account trader should also have the ability to trade three units, or three mini lots. But ideally, the mini-account trader has the ability to go up to six mini lots. So if I say I am doing a 1 unit on a trade, I am in fact trading in two lots and have the ability to scale out of a winning trade at two price points. If I am doing two units, I am in fact trading four lots and have the ability to scale out of a winning trade at four price points. Scaling out of a winning trade and trailing a stop loss behind you is a necessary skill you must acquire in order to become successful. 75% of my trades are done at one or two units. If you only have the ability to trade a single unit, regardless or your account size, trading will be very difficult.

Now let's talk about what percentage of your account is appropriate to risk per trade. Let me tell you right now that on average, the professional trader has about the same winning trade percentage as the amateur trader. Believe it, it's true. The key difference is that the size of the professional’s winning trades are larger than his losers, where as the amateur's winners are about as big as, or even worse, smaller than his losing trades.

So if professional and amateur traders alike can only expect to be right on a particular trade anywhere from 35-75% of the time on average, what percent of his total account could he responsibly risk on that trade? For my own personal accounts, I would never risk more than 15% of my account size on any trade. I am just not that good of a trader and I know it. On a normal trade I try to risk less than 5% of my total account on a particular trade. So that means if I have a $5,000 mini-account, I cannot risk any more than $250 on a particular trade. So for those of you asked me how to position size, here it is. We must work backwards to calculate the amount of lots we can trade. Let's say the trade calls for a 25 point loss. Divide the total dollars at risk, $250, by the size of the stop loss, 25 pips, to get a per pip value of $10. So if we are to risk 5% of our account on a single trade, we need to make each pip worth $10. And because we know that a mini-EUR/USD pip is $1, we now know we can trade 10 mini lots or one standard lot. If I want to risk 2% of my $5000 account on a trade with 20 pip loss, that is a risk of $100 on the trade. Now divide $100 by the size of the stop loss, 20, to get a pip vale of $5, which is 5 mini lots.

So bringing it back to units, if I say I'm doing a trade with a normal stop loss size and with a unit size of one, I am trading with two lots. Now, say the reader decides he wants to the trade with me and determines he is willing to risk 5% of his account and calculates an appropriate position size of 5 lots. Because I am trading with one unit, or two lots, I am going to scale out a two price points. Obviously five lots cannot be divided in half, so consider three lots as the first half of your unit and two lots as the second half of your unit.

Again, keep in mind that I can't tell you what percentage to risk on your account. You must decide that for yourself. But what I can tell you is what under normal trading conditions I would risk about 3% of my account on a trade. If I really like the trade, I would risk 5-8% of my account. If I think a trade has the potential to allow me to take the rest of the year off, I would risk 10% of my account. If we risk 10% of our account, we should expect to make a 20% return on that successful trade. Keep in mind that a 20-30% annual return on a portfolio in any market, especially a difficult one like this, is what the pros strive for. Risking 10% on a single trade is like saying I am going to make in one trade what the pros try to make all year.

Todd Gordon is a Technical Currency Strategist and Fund Trader with GAIN Capital Group.

Disclaimer
The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.