Would you go on a 15 min scuba diving gig with a 5 min supply of oxygen? Or, for that matter, buy a car without a safety belt or an air bag? I doubt you would (or in most countries today, even could).
Still I always meet people who want to trade, on a, say, USD10,000 account, a strategy that requires USD50,000. When I ask them why they’d want to do that, many seem ‘not sure’. So to make doing the math a bit easier, I’ve included, at the bottom of this page, a new section called “Matching the strategy to the available capital”. Just enter your data into the yellow fields and your risk per trade in USD and, more importantly, your risk per trade as a percentage of your capital will be automatically calculated.
Note that even the best strategies can, and will, produce 5 or even 8 losers in a row, you just have to trade long enough. Your account, and you as a trader, must withstand these potential extreme, even catastrophic events! Think of this calculation as your airbag in your car. Most of us will never have to use it, but still, we wouldn’t get a car without it. It’s just something we must have. That 2% risk per trade limit (meaning, at any one time, your total exposure to the market should not exceed 2 (or x) % of your account size), is also just something we simply must have.
One more thing: most of us seem to throw around this “2%” figure. Why, you might ask, rightly. Well, there’s no hard-fast rule, but consider this: if you ever run into a streak of 8-10 losers in a row, you’d lose about 15-20% of your capital. While you wouldn’t be happy, you could certainly re-build the account, if the strategy otherwise has a positive expectancy. But if you trade with a 5% risk per trade, 10 losers in a row would wipe out almost 50% of your account. To come back from there would be a daunting task. So better stick with that 2 or so %, and stay in control.
Check out that xls page, play around with the numbers, and put the math on your side.
Mindful trading!
