Many new traders start trading with a small account and large risks. This is a formula for failure. When you start trading you should think about being able to trade for a long period of time and slowly grow your account. You should also treat your trading as a business. If you started a business you wouldn’t want to go out and lose 50% on your first business deal, would you? Then why risk that in trading? The chart below shows different percentages of losses and the percentages required to get back to just break even. If you have a 50% drawdown you would need to make back 100% to get to even again.
One way to manage your risks and stay in the game is proper position sizing. If you are trading stocks or ETF’s then know your maximum risk before getting into the trade. It is OK to start small and build confidence. Start out risking 1% to 2% per trade. You can do this by knowing your account size, entry price, stop price and target price.
If you are trading options, then the total cost to purchase the options should be 1% to 2% of your account value. A high percentage of options expire worthless and if that happens to a trade your maximum loss is the 1% to 2%. Choose an expiration that meets your trading style, and has time to work. If you are day trading, then weekly options that expire that week or the following week work fine. If you are trend trading, you need to give the trade time to develop. Then look at options that expire 2 or 3 months out, so you are not losing premium due to theta decay.
I hope this was helpful.
Simpler is Better,
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