VIDEO LESSON AND HOW TO TRADE - Money Management: How to Determine an Initial Stop Level
19 November 2014, 18:11
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50% or more of the trades are losers. These trading strategies
and traders are successful not because they are highly accurate on a
trade by trade basis, but because when they are wrong they cut their
losses quickly and when they are right they let their profits run.
While the trading strategy that you eventually end up trading for
yourself may have a higher success rate than what I mention above, any
strategy is going to have loosing trades, so the first key to staying in
the game is to have a plan for managing those losses so they do not get
out of control and wipe out your chances for success.
Traders who set their per trade risk level at 2% of their trading capital or less, not only put themselves in a situation where a fairly lengthy string of losses will not knock them out of the game, but also put themselves in a situation where any one trade is not going to make or break their account. This is important not only from a money management standpoint but also from a trading psychology standpoint in that they are not attached to any one trade and are therefore more likely to stick to their strategy.
In order to have a true understanding of what this number should be for a specific strategy you will need to know what the expected accuracy rate is for the strategy, something which will cover in later lessons. For now however it is sufficient to simply understand that you need to have a feel for how much you plan to risk on a per trade basis as a first step in designing a successful money management strategy, and that you should be very wary of any strategy which risks more than 2% of your trading capital on any one trade.
Now that we understand that determining how much to risk per trade is the first step in any successful money management strategy, we can move on to other methods of setting your initial stop which fit within the limit set by the amount a trader is willing to risk on a per trade basis.
Traders who set their per trade risk level at 2% of their trading capital or less, not only put themselves in a situation where a fairly lengthy string of losses will not knock them out of the game, but also put themselves in a situation where any one trade is not going to make or break their account. This is important not only from a money management standpoint but also from a trading psychology standpoint in that they are not attached to any one trade and are therefore more likely to stick to their strategy.
In order to have a true understanding of what this number should be for a specific strategy you will need to know what the expected accuracy rate is for the strategy, something which will cover in later lessons. For now however it is sufficient to simply understand that you need to have a feel for how much you plan to risk on a per trade basis as a first step in designing a successful money management strategy, and that you should be very wary of any strategy which risks more than 2% of your trading capital on any one trade.
Now that we understand that determining how much to risk per trade is the first step in any successful money management strategy, we can move on to other methods of setting your initial stop which fit within the limit set by the amount a trader is willing to risk on a per trade basis.
