Email: How much should I risk per trade?

From email:

“I guess the short of it would be what % of capital should your average trade be? I understand theres so many variables that effect the answer to that question, but still am curious. I’m trading around 40k right now, and have only been trading live for a little over a month. Most of my trades have been under 10k, but maybe 30% have been a little over. With the larger trades I’ve noticed alot of the time I either have a pretty tight stop and end up getting stopped out, or I’ll end up exiting too early taking profits, but not having the stomach to wait for the trade to really start working.”

What makes trading difficult and individual is that every person sees risk differently. Their comfort level is different.  Your comfort level is based on:  how much income you have coming in verses your bills, your liquid net worth, what you want to accomplish from trading, how much time you want to devote to trading, and what you expect to get from trading.

I do not think you should risk your whole liquid net worth especially if you are a new trader.  I would take some percentage of that.  Having to wire money in to trade will force you to take a step back after that predetermined loss. It is great to have “unlimited” capital or the unlimited capital mindset but only when you are winning.  You must earn the right to take more risks.

I think risking 10% on a trade is too much, the caveat is if it a position trade that may require that much.  Risk needs to be optimize.  By optimize I mean risking the least amount in order to see the thesis work out and get to a max position.  If you are risking too much you will be blinded by your DOM and miss the subtle changes in the market that allow you to scale back a position or add to it or get out.  If you are getting out when you get to break even you are risking too much.  The relationship between the price you got in and where the market is should not be a factor.  You should get out when the reason for the trade no longer exists or your targets are hit.  A significant portion of your trade should be pre planned if not all of it.

How much heat you take is important but more useful on the next trade. The exception being getting filled on the best which shows a lack of supply.  Even that information can be a bit hazy, it could mean that you got a great price or it could mean that it needs to trade that price again to ultimately more further in your direction.  You have to learn from what happened recently and have market awareness.

Theoretically, the more risk you take the more reward you get.  Until you are in a position to take full advantage of that risk I would suggest taking less.  Being able to take advantage of risk requires being comfortable with that risk, knowing that if you lose you can get it back, and having a trading plan that allows repeatable/improvable results.

Above all remember, you have to earn the right to take risk.  Having a trading account does not necessarily mean you have earned that right.  The best traders take the most risk when it makes the most sense to them, they take the least risk when it doesn’t.  It is not a matter of letting your winners run and getting out of your losers, it is about taking more risk when you are right or has the most potential and less when you are wrong or have the least potential.

The question should be how much do I risk per trade when it has the most potential and how much when it has the least potential because not all trades are created equal. But there should always be a cap on that risk.  One of the big things we preach to our students is trading larger, risking the same amount and taking some off when they give you risk back. Total risks matters too but that is a topic for another post.

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  • Anonymous

    I would suggest risking 10% of your account on one trade is too much.  Its possible (likely, even) that at some stage you will have a big run of losses and 10% only lets you have 10 losses before you can’t play anymore.

    Perhaps you mean 10% of capital at risk in total, spread amongst a few trades though – although I would still say that’s quite aggressive!

    • Will never give specific advice but I personally would never risk 10% on a trade, maybe 10% of “their” money. 

2 Responses to Email: How much should I risk per trade?

  1. Anonymous says:

    I would suggest risking 10% of your account on one trade is too much.  Its possible (likely, even) that at some stage you will have a big run of losses and 10% only lets you have 10 losses before you can’t play anymore.

    Perhaps you mean 10% of capital at risk in total, spread amongst a few trades though – although I would still say that’s quite aggressive!

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