[This is part of the series: 9 Rules On How To Become A Trader]
Rule # 2 on being a profitable trader: Avoid Big Losses.
The old line that goes:
“There are two rules to trading. The first is: Don’t lose money. That’s also the second rule.” seems to apply again here.
The fundamental point of this is: If you are going to trade, you have to have the equity to be in business.
And how are you going to be in business for very long if you are risking it all on one single trade?
If you are willing to take a 5% – 10% loss on each position, your trading life may be short-lived.
Starting with $10,000 and risking 10% equity, 5 losing trades in a row will leave you with less than $6,000 – and that is if you scale your percent loss to your dwindling equity roll.
The answer to this issue is common sense:
Never, ever – ever – let a trading loss get too big for you to handle.
Always live to trade another day.
As a good rule, I believe that no trade should risk more than 1% – 3% of your total trade equity.
Maybe use .5% – 1% to be more conservative. And 2% – 4% to be more aggressive.
Take for example, someone who starts with $20,000 and is willing to risk $400 per trade – or 2%.
In that case, 10 losing trades in a row would be a 20% draw-down ($4,000).
The point is to play with it and find a ratio that works for you and your trading.
Be a professional.
And – never – ever – let a single loss wipe you out.