HOW MUCH TO RISK PER TRADE?
One of the most common questions with beginning traders is “how much do I risk”? While this seems like a no-brainer type of thing…it can actually get quite out-of-hand quickly if not properly addressed. I’ve seen many traders risk substantial amounts of capital on one or two “sure-thing” trades.
Here are a few rules:
1. Set a percentage (usually 1-2%) of your ENTIRE capital base which will be at risk at any given time. This means that if you have decided to risk only 1% of your capital, and you have two separate trades open, then you should risk .05% of your capital on each one.
2. Treat EVERY trade the exact same way. Meaning this: Even if you think that ABC stock is going to go up, and there is no way that it can go in the opposite direction (dangerous thinking), you still ONLY risk the appropriate capital amount on each trade.
3. Stick with your plan!!! Don’t ever deviate from it. Even if you are down for the month and you think that the next trade is going to dig you out of the hole. You must resist this type of thinking – since it will ultimately destroy your account.