How Much Risk per Trade?

“You may have heard something like “Never risk more than 2% per trade.” If you’re not sure how much to risk per trade, then this article might answer your question.

Maximum Drawdown

The first thing to understand is the question: what should a maximum drawdown be?

As you can see from this graph the bigger the drawdown, the more percentages you have to make back in order to get breakeven. What this also means is that you need to spend more time recovering these losses. At a 50% drawdown you already need twice as much performance and time to get back to zero losses! At 30% drawdown you need to perform 10% more to breakeven. You don’t want to go over 30% because it will exponentially increase your efforts to make back losses and waste your time.

Loss strikes

Now let’s think of your whole trading career. How many trades will you make to reach your personal goal? 100, 1000, 5000? Of course, this number will be high because as a trader you want to stay in the game as long as possible, right? Let’s say you have a winning% of 40, then loss strikes look like this:

The drawdown we should expect to have is the one with a probability of over 1%. Here it is 12 loss trades in a row. 12 times getting ripped is not easy to overcome psychologically, but that’s another topic. It should result in a 20% drawdown. However, we haven’t considered how good you are as a trader yet.

Profit Factor

The higher your average winning$ vs your average losing$ and your winning% are, the better this number will become. A profit factor over 1.5 is already exceptional, if one can keep it consistently. Anything that comes close or above 2.00 is super profitable.   This is an average number including all trades. You must consider that this number will go down in drawdowns and up in winning streaks, therefore you should only calculate it after a substantial amount of trades (100 at least).

Invest in your skill

Instead of increasing risk percentage the best thing to do is invest in getting better. Put in the hard work, get good coaching, work on your psychology, review and journal your trades, find your weaknesses and find the setups that you can trade best. All of this will help you become a top performer and then being able to increase your risk percentage.

Different Trading styles

There’s not only one way to become a top performer. Here are three examples that lead to a profit factor of 2.00.

Trend Following:
  • Winning%: 33.33
  • avg Winning$: 400
  • avg Loosing$: 100

Getting there: Let winners run longer, become more patient.

  • Winning%: 80
  • avg Winning$: 50
  • avg Loosing$: 100

Getting there: Find super high probability situations, master and become very focused on these setups.

Somewhere in the middle:
  • Winning%: 50
  • avg Winning$: 200
  • avg Loosing$: 100

Profit Factor, Risk per Trade, Trading Skill

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