It is called risk management. Very few traders observe proper risk management then, whine when their heads get chopped off. You do not know which trade is going to be a big winner. My big winner NVAX just recently, I got in because of the price action of the stock. Did not even know it was involved in developing a vaccine for Corona Virus. Now, don't go chasing it because it just sold 150 million shares in an offering. Dilution by a huge amount. Closed my position just today. Trying to guess which stock is going up and by how much is a fool's errand. Think like a casino. Let the gamblers gamble and risk all their monies. The end result is the casino wins it all. If you have proper risk management, you have a chance to do well. Now all you have to do is pick some good stocks.
Thank you very much smallfil for the comments. Question for you. Do you believe that good risk management is also good profit taking management? Should trader try to improve for Risk : Reward greater than 1. IMO, the answer is yes.
This is a no brainer but, before you take a trade, you want your reward to be multiples of your risk. So, if you are risking $100 on the trade by an example, you want to make $500 on that trade. It is a law of numbers like the casino. Not every trade even with the best setups will win. However, if your several multiples of reward relative to your risk, you can place 6 trades, win just 1 trade and lose 5 trades. What have you got? You won $500 on the 1 winning trade, lost $500 on the 5 losing trades and you broke even? That is on 16.67% winning rate. Now, if you have more winning trades, you would be positive and make monies. No need to guess which trade will give you the best returns.
Exactly smallfil... Example.. friday I was up 5k on inverse swings SQQQ TVIX etc... I held small size over the weekend and am taking small few hundred $ stops today.. big win followed by small stops. Look at trading as a SEQUENCE of small trades with position sizing. I usually start swings really small eg under 50 shares,, then martingale scale into winners, taking small $200 or less stops as goal for stopouts
Depends on strategy. In some strategies I risk up to 500%/trade. Though I’m not sure why some people are confused and don’t understand that whether 100%/trade or 500%/trade, it has nothing to do with losing specific % of account size. 100% loss per trade could amount to losing 1% of account, or whatever other percentage.
Thanks for the explanation. It is a no brainer, but I have not been putting value into risk neither the reward. I was just taking the trade and often exit with reward smaller than the risk. I never valued risk management. Now I do. Overall, I like the risking 1-2% of account balance per trade. Cause it gives me a chance to be wrong a few times including those mistake trades.
FWIW I totally ignore %es, I obsess over net $ and p/l... Eg I buy $600 worth of whatever, 30shares of $20 stock or 100shares of $6 stock, it's all about specific $ allocations
Here4money, Can you please give example of what you mean? My simple understanding is, if your account balance is $50,000, you set a risk % tolerance of 1 or 2. Which means you can only risk $500 or $1000 per trade. Is that what you mean?