In an earlier article, I discussed risk, and how much risk a trader should take on for each trade. One of the best discussions I’ve found on the topic was from the book “Market Wizards,” where one of the professional traders suggested that 2% should be the maximum risk per trade.
One reader commented that even 2% was too extreme, and that 1% risk is a better number. This reader obviously understands the importance of minimizing risk, and I wish more traders, especially newer traders, were more like him. Let’s look at the numbers, and see why.
The true objective in the trading game is to stay in the game as long as possible. Most people think it is to make as much money as quickly as possible, but really longevity, coupled with a positive expectancy (winning) system, is what you need. Even the greatest trading system in the world will lead you to ruin, if you risk too much per trade.
The amount you risk per trade directly impacts your ability to stay in the game. If you risk 50% per trade, it takes you one loser to lose 50% of your money. Go down to 10% risk, and you can survive about 7 consecutive losing trades.
The results become even more pronounced as you risk less and less. If you risk 2% on each trade, you can survive 35 consecutive losers before half (50%) of your money is gone. But, reduce that to 1% risk, and you can last for 70 trades, twice as long.
Now, I realize that even the worst of systems will never have 30 consecutive losses, but the point is that your staying power is much, much greater with lower risk. And staying power is what you want in order to give your trading method a chance to succeed.
Having once been a small size trader, I know how difficult it is to risk small percentages per trade, especially when commission and slippage costs are factored in. But, remember your end goal: to stay in the trading game, and make long term money. To do that, you need to bet small consistently.
