Costly Trading Mistake #3 (And How To IMMEDIATELY Fix It)
Taking Too Much Risk Per Trade
If you risk more than 3% of your trading account on any one trade, you are not in the business of trading.
Taking too much risk is a consistent characteristic of almost every unsuccessful trader. There are all sorts of psychological reasons traders do this. It almost always relates to the failure to accept that the trade could be a loser. The more time and energy a trader devotes to identifying the trade set-up, it seems the more he or she believes the trade will be successful and is worth a larger position with more risk.
Be Ruthless About Limiting Capital Exposure Per Trade
Consistently successful traders are ruthless about limiting their capital exposure on each trade. Consistently unsuccessful traders frequently take way too much risk per trade and set themselves up for big, unrecoverable loses.
Consistently successful traders always assume a trade has as good a chance of being a loser as a winner and they cannot predict in advance which it will be. That is why they are ruthless about limiting their capital exposure on each trade. Consistently unsuccessful traders always assume the trade will be a winner which is why they usually take too much risk per trade and are never able to recover from a short series of loses.
Trading and Risk Management
Risk management is as important as maximizing profit, maybe more so. It is no different than with every other business. Every business has risk. But, an important part of any business plan is to identify and minimize the risk so the business will continue to prosper even when things don't work out as planned. Preservation of capital in the business of trading is crucial. That is why ALL successful traders are ruthless about managing risk.
How To IMMEDIATELY Fix This Costly Mistake
This is a very easy mistake to overcome, and can immediately improve your bottom line. Every trader must have an inviolate rule that the maximum capital exposure (risk) for any one trade will be no more than 3% of your trading account. The number of shares or contracts you may have for any one trade will depend on the price you entered and where the initial stop is placed. Here is a simple example of how to determine trade size.
Assume a $100,000 stock trading account. Three per cent is $3,000 maximum capital exposure for a position. Stock price at entry is 61.50 with a stop at 59.50 for a $2 capital exposure per share. $3,000 / $2 = maximum 1500 share position. The position size is determined by the initial entry, stop and account size. For the conditions above, a trader who enters a position with more than 1500 shares (greater than 3% account risk per trade) is probably an unsuccessful trader or soon will be one.
Consistently successful traders are ALWAYS aware of the maximum risk per trade and NEVER let that amount go over 3% of the trade account.
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