Risk Management for the Trader in 1 Lesson

Risk Management for the Trader in 1 LessonThe very first rule we live by is: Never risk more than 1% of total equity on any trade. -Larry Hite (Market Wizard)

I try very hard not to risk more than 1% of my portfolio on a single trade. –Bruce Kovnar, (Market Wizard)

One of simplest lessons that a trader can learn to ensure long term success, is never risk more than 1% of your trading account on any one trade. This does not mean trading with 1% of your account capital, it means adjusting your stops and position sizes based on the volatility of  your stock,  currency, commodity, option, or future contract. This way,  when you are wrong, the consequences are the loss of 1% of your trading capital. This not only eliminates your risk of ruin for a string of losing trades, but also decreases your stress level so you trade with a clear mind.

If you don’t understand the reality of having 10 to 20 losing trades in a row, then you haven’t been trading long enough to experience a volatile market, or an unexpected event that shakes a stock, commodity, currency or an entire market.

The #1 job of a trader is not to make money, but to protect what they already have so they can continue to grow their capital.

Your trade entries should be designed at a price level and a position size that if after you enter a trade and it retraces, decreasing your trading capital by 1%, you will know you were wrong and exit.

The opposite of this method, is that you will let your winner run until it reverses through a trailing stop at a price level that shows that you  should exit and lock in profits, because near term support was lost. Your losses should almost never be more than 1% of trading capital, but your wins can be 2%, 5%, 10% or even larger when you enter at the price sweet spot, and a trend takes off.

Small losses and big wins is the secret to being a successful trader.