Trading successfully is a numbers game and each trade makes up your trading strategy. Sometimes you will win and sometimes you will not. Losses should only have a very small impact on your capital. Your strategy is to win with your trades, control your losses and protect your capital base.
One of the biggest failures among traders is the inability to manage risk and control losses. If you do not control the extent of your possible losses how long will you last as a trader? Once your capital is gone your next trade would be impossible. So what method works in practice? A simple formula is used. Remember it is the simple techniques that have proven time and time again to work.
The position you take on a trade is determined by your capital size, the level of risk and how much of your capital you are prepared to risk. As a general rule if you are risking more than 1-2% of your capital for each trade then you will not be trading long before you are wiped out. This is especially important if you have a run of losses one after the other. Remember your gains need to exceed your losses in order to make money at trading.
Mathematically this can be expressed as trade size = account risk/trade risk. So if your account is $10000 in value, your account risk would be $200 if you are trading at the 2% level or $100 if using 1%. Effectively we are saying that you cannot lose more than $100-$200 depending on your trading level. Now we look at the trade risk which is the difference between where you entered the trade (entry price) and where your exit if it all goes wrong (stop loss).
Using a mathematical method eliminates the guesswork in trading. This allows you to profit when some trades succeed and make money and when others loose. As long as your gains exceed your losses money can be made in trading.
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