Risk management is probably the most important strategy traders need to implement. I have read many books and blogs on trading where a simple 2% risk rule is advocated, but I have found that it doesn’t work for me.
First, take some time to read this post from Dr Brett where he uses a simulation tool to look into the risk of ruin for a trader. As the good doctor points out, the risk of loosing all of your capital not only increases by raising the percentage of capital on the table, but also by how frequently you trade, your edge (how good you are,) and how much capital you have (if you consider margin and minimum cash balance requirements for your trading account.)
If you are an experienced trader you can be very successful with a risk of 2% per trade or greater. But if you are a beginner and are developing your edge, you should risk a fraction of that. As one of my trading teachers (Josip Causic) repeated constantly “The market will teach you the same lesson whether your risk $20 or $100.” As you develop successful trading strategies and systems you can increase the capital at risk. Also consider the minimum account balance required for the type of trading account you have. For example, if you have a margin account in the US you need a minimum of $25,000 or you’ll get a maintenance call from your broker. If you have $30,000 in your trading account you can potentially be out of the game very quickly. It will take a loss of $5,001 to get the dreaded call from your broker. Just 9 bad trades in a row at 2% of your portfolio each would put you below the limit.
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