How Much Risk per Trade?

You may have heard something like "Never risk more than 2% per trade."

If you're not sure how much to risk per trade, then this article might answer your question.

Maximum Drawdown

The first thing to understand is the question: what should a maximum draw down be?

Draw Down Probabilities

 

As you can see from this graph the bigger the draw down, the more percentages you have to make back in order to get break even. What this also means is that you need to spend more time recovering those losses.

At a 50% draw down you already need twice as much performance and time to get back to zero losses! At 30% draw down you need to perform 10% more to break even.

Therefore: You don't want to go over 30% because it will exponentially increase your efforts to make back losses and waste your time.

Loss strikes

Now let's think your whole trading career; How many trades will you make to reach your personal goal? 100, 1000, 5000? Of course, this number will be high because you want to stay in the game as long as possible, right? Let's say you have a winning% of 40, then loss strikes look like this:

Loss Streaks Trading

 

The draw down you should expect to have is the one with a probability of over 1%. Here it is 12 loss trades in a row. 12 times getting ripped is not easy to overcome psychologically, but that's another topic. It should result in a 20% draw down. However, you haven't considered how good you are as a trader yet.

Profit Factor

Profit Factor Formula

 

The higher your average winning$ vs your average losing$ and your winning%, the better this number will become. A profit factor over 1.5 is already exceptional, if one can keep it consistently.

Anything that comes close or above 2.00 is super profitable.

This is an average number including all trades. You must consider that this number will go down in draw downs and up in winning streaks, therefore you should only calculate it after a substantial amount of trades (70 at least).

Invest in your skill

Instead of increasing risk percentage the best thing to do is invest in getting better. Put in the hard work, get good coaching, work on your psychology, review and journal your trades, find your weaknesses and find the setups that you can trade best. All of this will help you become a top performer and then being able to increase your risk percentage.

Different Trading styles

There's not only one way to become a top performer. Here are three examples that lead to a profit factor of 2.0:

Trend Following:

  • Winning%: 33.33
  • avg Winning$: 400
  • avg Loosing$: 100

Getting there: Let winners run longer, become more patient.

Scalping:

  • Winning%: 80
  • avg Winning$: 50
  • avg Loosing$: 100

Getting there: Find super high probability situations, master and become very focused on these setups.

Somewhere in the middle:

  • Winning%: 50
  • avg Winning$: 200
  • avg Loosing$: 100

That's it for now. Make sure you check out the Risk Simulator to learn more about how position sizing affects your trading system.

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