Education: The Importance of Money ManagementJune 17, 2018
We’ve always noted that you should use at least a -25% stop loss on stocks, and -35% on options. While we’ve often been lax with stops, they are essential and should be a part of all trading strategies.
We also wanted to mention risk per trade.
One of the toughest decisions any trader (especially new traders) must face is how much trading cash to risk. The easiest answer to that “is as much as you can afford to lose.”
But that’s not good enough of an explanation.
The traders who enjoy the greatest amount of success are those with established rules of money management, or determining how much of their portfolio they’re willing to put at risk in one trade. It’s like playing poker. It’s very rare that a player will push all their chips into any single bet. It’d be foolish to do so.
However, if that player only risks a fraction of their money on any one bet, they know that if they win or lose, they’ll still have a way to play the next hand. Right or wrong, you will still have enough money left over for the next trade. Most traders that I’ve talked to are comfortable trading between 2% and 5% of their portfolio in a single trade. Others risk as much as 10%. It really depends on your comfort level.
Also, determine what kind of trader you want to be – aggressive, risk taker or the conservative.
Aggressive risk takers will risk 5% to 10% on every trade. Conservative risk takers will risk between 1% and 5%.
Again, it all depends on what kind of trader you want to be.
Once you determine that, multiply your entire account balance by your risk percentage. This will give you the amount you should risk per trade.