The fixed fractional method

Firstly, you need to identify the amount of funds you have allocated to your trading activities. Usually, this is a simple matter of checking the balance of your trading account. The next step is to decide upon the level of risk that you are willing to accept on each trade. In other words, what percentage of your trading capital are you willing to lose on each trade? A commonly used figure by many in the markets is 2 per cent, which is why this method is also sometimes known as ‘the 2 per cent rule’. Although we will run with the figure of 2 per cent for the examples that follow, there are many views on what this percentage should be.

Let’s assume you currently have US$30 000 available for trading. If we use the 2 per cent figure, this means you are willing to accept a loss of 2 per cent of US$30 000, or US$600, on your next trade. When you have determined the dollar amount you are willing to risk, you need to look at your intended trade and work out how much risk you are facing in terms of pips. To do this, simply work out the difference between your entry price and the stop-loss price.