Foundations
Risk first, reward second: how I size every position
The traders who blow up are almost never wrong about direction. They are wrong about size. Here is the rule I use on every single trade.
I want to give you the single most boring, single most important rule in trading. Risk no more than 1 to 2% of your account on any one trade. If you have a $25,000 account, that is $250 to $500 of max loss per position. Not premium. Max loss.
Why so small
Because losing streaks happen. Even great traders go through stretches of five or six losers in a row. A 2% risk per trade survives ten losers in a row with 80% of your account intact. A 10% risk per trade leaves you with 35% of your account after the same streak. One number ends careers; the other ends a bad month.
The first job of a trader is to stay in the game. Everything else is downstream of that.
How to do the math fast
Every defined-risk trade in this app shows you the before you place it. The math from there is one division.
- $50,000 account, 1.5% risk: $750 max loss per position.
- $25,000 account, 2% risk: $500 max loss per position.
- $10,000 account, 2% risk: $200 max loss per position.
Find an idea whose max loss fits. If you have to size up just to make it interesting, the trade is already too small for your account. Move on.
Why credit-trade math fools beginners
Credit trades collect premium up front. A jade lizard might collect $100. The buying power required might be $400. The temptation is to think the risk is $100. It is not. The max loss is the buying power figure, not the credit. Always read max loss, never premium, when you are sizing.
What to do next
Decide your per-trade risk number right now. Write it on a sticky note and put it next to your screen. Every time you open a trade in the app, read the max loss before you read anything else. If it is bigger than your number, close the tab. There is always another trade.