A One Percent Position Size is Paramount
We always recommend that traders only ever risk 1% of their trading capital on any one trade; this protects their trading capital as well as their emotional capital. This means that, in a losing streak of, say four or five trades, they still have capital to trade another day and their trader mindset is not knocked around by the experience. We have analysed the charts, placed our order, defined and accepted the amount of the risk, then allowed the markets to determine the outcome; stop or target - whichever comes first.
However, it is also important to trade no less than 1% per trade either. This is so important yet it is often an overlooked aspect of trading that is paramount for consistent trading success.
It is important to maintain the 1% risk per trade, no more and no less, at all times. When we are consistent with our position size we will have consistent outcomes. It is very difficult to review our profitability against our win:loss rate if the position size is variable from one trade to another. Traders who are novices or beginners will often reduce their position size after a couple of losers. There are various reasons for this and are all unhelpful to profitability. One reason is that they are unsure of their strategy, another is they are unsure of how to use their trading platform in relation to calculating the correct position size.
Yet another reason to vary position size is to assume they are protecting their capital, so by reducing their position size they falsely assume they are protecting their capital. Yet it’s the following trade that is likely to be a runaway winner. At the very time they needed a full position size they only had a half, or quarter, position on it. This plays havoc with profitability as well as impacts negatively on a traders mindset.
Traders also reduce their position size due to a sense of not wanting to risk the dollar amount that a 1% position would represent. This faulty thinking can come about from not truly accepting the cost of entering the trade, i.e. not fully accepting the risk. If this is the case the trader may want to re think how much they are truly willing to risk on any individual trade.
The final reason for reducing position size can come from a sense of being unduly ‘punished’ if the trade goes to stop. The important thing to realise here is that the cost of the trade going to stop needs to be large enough that the trader takes the trade seriously i.e. the cost of a cup of coffee will not have the same learning capabilities as the cost of a small car, yet small enough that the trader will not feel unduly penalised if it goes to stop. It is very difficult to enter a trade if the consequence of a loser is so great as to affect thinking and/or lifestyle.
The best way to address all these issues is to decide in advance what size a trading loss would make us take notice of the outcome yet not impact too harshly as to affect trading decisions. This will vary from person to person, however, once this dollar figure is established then this becomes the position size. Place funds into a trading account so that this cash amount represents a 1% position size.
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