Short-term trading is never only about analytics. It is also about systemic risk control. Your analytics can change from day to day, moment to moment. In fact flexibility and open mindedness are the key attributes of all skillful short-term traders. However, when it comes to risk control your system must be well thought out and rigid as a column of steel. You can experiment all you want with your trading setups, but deviate from your risk control rules and you will always pay a heavy price. It doesn’t matter if you run a $500 retail FX account or $5 billion hedge fund like LTCM. Ignore the rules and the market will smite you.

Although everyone has a different tolerance for risk, here are my day to day rules.

1. Leverage

In trading, there are two ways to generate leverage. You can use high margin or you can have a high turnover. I prefer the later. I don’t trade with more than 10:1 margin and generally keep my ratio to 5:1. That means that for every $10,000 in my account I will not hold more than a 100,000 unit position at any given time. My goal is not to “press the pedal to the metal” on every trade but rather to make money one pip at time. My plan is take many trades throughout the day and average 20 pips/day or 100 pips/week. If I can do that consistently that means I am generating $25,000 of profit per year for every $10,000 of capital at risk. That would be pretty damn good.

2. Stops

I trade with fixed stops of 20 pips – regardless of whether I am trading yen, pound or any other pair. I know this ignores the whole issue of volatility but I don’t care. It simplifies my trading enormously. I trade with fixed stops of 20 and fixed take profits of 20. During a typical day when I am busy with a million things this system has saved my hide more than once. I NEVER WIDEN MY STOPS, but I may bust out of the trade early if I don’t believe it has the power to reach my target. Over a long period of time and after doing thousands trades I learned that 20 points is the perfect amount of risk for me. If I get stopped at -20 it’s because I am dead wrong in my analytics or my timing.

3. Position sizing

Again I opt for simplicity. I generally open with 1 unit (so if I had 20K in my account my opening trade would always be 100,000 units) but if I am extremely confident in the trade I will double my bet and trade with two units from the start. That’s the maximum position sizing I allow myself. I never add to a losing position but I will double my bet to two units if I get stopped out and I am confident that the trade should work and I was just early. If I get stopped on 2 units I step back and bring my size back to one because I am clearly wrong on the trade.

4. Day Limits

Generally I never reach them, but if I am down 5% on my equity (-$500 on 10K account) I stop trading for the day. There are a million factors that could be responsible for such a drawdown but the single most important action at that time is not to try to figure them out, or to try to get the money back, but to simply STOP TRADING. This is the most common reason why most short term traders blow up their account. When it come s to trading the Hippocratic oath is a pretty good rule to follow – “first, do no harm.”

Boris Schlossberg serves as director of currency research at GFT, and runs bktraderfx.com.