This is a pretty common question. Most people want a clear and simple equation. But there isn’t one. This is something that you need to answer for yourself. Answering the following questions should help clear it up:
What am I capable of making in a day?
On your up days if you are making net $100 you should not be risking a net $1000. That means for every losing day it takes you 10 days to get back to even. It takes confidence, skill, and an almost nonhuman perspective to come out on the other end a better trader. Your goal as a trader is to extend your career, be able to trade tomorrow. Chances are if you are losing $1000 in a day you aren’t getting your moneys worth in knowledge. Learn as cheap as possible. On the flip side without risk there is not reward. It is also important to think about it in terms of total risk and total loss. For example, 5 trades x $100 a risk per trade = $500. Lets say your results look like this +100, -50, +75, -100, -50 your total loss is -$200 but net loss -25. Remember you have a choice to stop trading at any point, you do not have to stop when you are down your limit. You just extended your trading career by one day if you are risking $200. MAKE SURE TO READ THE CAVEATS BELOW.
How do I feel about losing?
If you are extremely risk adverse do not lose a ton of money. You will be mentally fried. Your focus will shift from making money and learning to just trading for the psychological gains. Optimally, every trader needs to exist just on the other side of their comfort zone. But there are times when you can’t for whatever reason. Don’t lose a bunch when you stuck there. If you are extremely uncomfortable it is a sign. Is it because you do not have the money to lose, lack a plan, the market is unclear, etc. It is your body telling you something, don’t ignore it.
How am I trading the current market?
Trading is betting on your performance. Betting that you are seeing things clearly. Betting that this is a good time to deploy your strategy. If you were a boxer betting on yourself, would you bet more when you were sick or at peak shape? It is ok to trade small or not at all. When you are not seeing things well or the market is not cooperating it is ok to not risk it all. This is easier said then done but it is made easier by not spending money like a prize fighter and having some perspective.
What is my weekly/monthly budget?
You need to have a weekly and monthly budget. These are important because it puts in natural red flags. Meaning that when you reach your downside you need to stop. The market has a tendency to speed up when you are trading like shit. Budgets slow you down and force you stop. It forces you to stop trading when you are not capable of trading well. Do not ignore it.
One of the concepts that is hard to grasp for traders is the difference between trading rules and trading limitations. Trading limitations box you in. They prevent growth. I am not saying that every opportunity is a chance for growth but not every opportunity is a chance for limitation. Limitations are cures not preventions. Focus on putting yourself in a position not preventing a bad one. I can’t say for sure what each person should risk in a day. To answer that question you need to know how much you are capable of making, how you feel about losing, how you are trading, and what is your budget.
You need to be aware of who you are that day and what the market has the potential to be. You and the market are what they are today. Yesterday has nothing to do with today. If you trade like you did yesterday and you aren’t the same person as yesterday or the market is not the same, chances are you are going to perform poorly.
If you are losing, find a way to slow it down. Extend your career. Understand who you are. Have natural stopping points. Stop before if it makes sense, nothing says you either have to reach your goal to the upside or stop. Spend more energy putting yourself in good positions not climbing out of bad ones. If you answer the questions from above and they all indicate you should be risking less, consider it. If you are making money, trading well, and not close to your natural stopping points consider risking more.
Accept, learn, apply knowledge, and then do all again on the next trade. The time you spend in each stage will improve if you are doing it. And when aren’t doing it right be prepared to start over.
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