The Power of the 1% Bet
One of the most powerful principles that makes me a successful trader is not stock picking, a specific indicator, or a trading holy grail. What allows me to win and stay in the game is that my top priority is to only risk 1% of my trading capital on any one trade. I do not start with profit targets or how much I can make I start with my 1% risk then figure out my position size and entry point. If I am trading a $50,000 account then I will start with $500 as my risk per trade. If $AAPL breaks above the 50 day moving average I can buy it at the break above and figure that $5 below the 50 day will be my stop loss point. As an example, if the average daily range was $5 I could trade 100 shares if I am confident that the volatility will stay steady with no sharp moves that over shoot my stop or I can trade 50 shares to give myself much more breathing room if the stock reverses strongly and it could also enable me to use end of day stops and ignore most intra-day swings. Understanding you can only risk 1% per trade should bring down your trading size and enable you to side step big losses. The 1% rule that causes proper position sizing will also turn the volume down on your emotions when the trade is moving strongly either for or against you.
Also if you are risking 5% or 10% of your capital on any one trade you are risking destroying your account. If you are risking a equal weighted 5% and you lose 10 times in a row you are down 50%, so you have to a 100% increase just to get back to even. Only the best traders in the world have 100% annual returns so your account is virtually ruined for years. The scary thing for new traders should be that all traders go through losing streaks of 10 trades. The best traders have equity draw downs of 10% from equity peaks.
Your profits are nothing more than a group of trades where your winners where bigger than your losers. For this to happen and for you to make money you must have small losers. That is why I cut my losses at 1% of my capital and let my winners run for 3%, 5%, or even 10% returns on total capital.
This is why you will see so many quotes from rich traders discussing risk management it is the secret sauce of trading success.