One of the questions every trader has to think about at some point is, how much of my account should I risk per trade? A percentage? If so, what percentage?
I’d love to have the right answer in my pocket for you, like “exactly 1.25% per trade/market and no more than 5% at the same time,” but unfortunately, I don’t.
Again I know you don’t want to waste too much time with this boring aspect of trading and just want a number to work with so you can
start trading. And I understand that very well, I’ve been in the exact same situation when I started out. But, the best advice I can give you is to not hurry over this and other important
aspects and take all the time you might need to figure this out in detail.
If you don’t, you’ll sooner or later learn why this is important the hard way. While I can’t give you a direct answer, let me try to give you some hints how you might find the answer for yourself.
First of all, you won’t find it if you don’t know from backtests, statistics or your trading diary of what kind of a winning rate, drawdown and portfolio exposure you will probably have to expect.
These are the very basic numbers to work with. Simply put, if you are a trend trader that might make all profit for the year in a couple of big winners, but has to take a lot of small losses you
can’t risk as much per trade as if you’re trading a system with a high winning rate and overall small drawdowns.
The second hint is to consider how many trades you’re in at the same time. Are you trading 2, 20, or 100 markets at the same time? What’s the correlation between those markets and those markets
being traded with your strategy? If you do 50 trades per day you’ll have a very different risk profile than a trader who does 50 trades per month.
There’s a lot more to think about, but I’d like to move on to the final aspect which is probably the most important. Think about your risk profile as a trader. How much can you handle before you
throw in the towel? It’s easy to see a drawdown of 30% on a simulated curve and think „no problem“ but it’s a totally different story when you’re in a real 30% drawdown losing real money. Is this
still „no problem“? Or do you think 20% are maybe more realistic for you? For most traders, take the drawdown that you think you can live with and then target 2/3 of it - this will probably be
what you can really stomach.
I hope this gives you a good overview what to think about regarding position sizing and an understanding as to why I simply cannot have the exact answer ready for you! I also hope it
inspires you to go deeper into this very important (and interesting once you understood it’s importance) topic and learn more about it.
Once you decided who much to risk per trade, you might want to watch my position sizing series on YouTube:
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