Risk Management for the Trader in 1 Lesson

The very first rule we live by is: Never risk more than 1% of total equity on any trade. -Larry Hite 

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

One of the most important lessons that a trader must follow to ensure his long term success, is to never risk more than 1% of his 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, so that 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 lowers your stress level so you can think and trade with a clear mind, and not have your emotions take over.

If you don’t understand the reality of having 10 to 20 losing trades in a row, then you have not been trading long enough. One huge unexpected event can cause a loss, and a trader can 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 it can grow.

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

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

With the 1% maximum loss per trade rule, each trade should only be one trade out of the next 100 trades. No one trade should be that big of a deal.

Small losses and big wins are the secret of winning traders.