Life is a fine balance between right and wrong, yin and yang and so on. In the same way, trading requires finding several balances. Second perhaps only to your account balance is, IMO, the level of risk you decide to subject your account to on every trade.
General advice says to not risk more than somewhere around 1-3% per trade. A common mistake I suspect for beginners (I was guilty of it myself in the beginning) was to risk far too much of the account. Doing that, as we all know, is an excellent way of doing real harm to your account when a few trades in a row go against you. Let’s not even think about the revenge trading that may follow.
When I grew up a bit trading wise, I realized that how much I’m prepared to risk on a trade has to be defined by how much I’m willing to risk losing, not by dreams of how much I can make if my trade is a winner.
I tried the different levels of risk and calculated what would remain of an account after a series of 5, 10, 15 or 20 consecutive losses. Don’t think that could ever happen to you? Think again. At least up to 10 consecutive losses must be expected to occur at some time during the trading career.
This is how it turns out:
1% account risk:
5 losses - 95.0% account balance left
10 losses - 90.4%
15 losses - 86.0%
20 losses - 81.8%
2.5 % account risk:
5 losses - 88.1% account balance left
10 losses - 77.6%
15 losses - 68.4%
20 losses - 60.3%
3 % account risk:
5 losses - 85.8% account balance left
10 losses - 73.7%
15 losses - 63.3%
20 losses - 54.4%
4 % account risk:
5 losses - 81.5% account balance left
10 losses - 66.5%
15 losses - 54.2%
20 losses - 44.2%
5 % account risk:
5 losses - 77.4% account balance left
10 losses - 59.9%
15 losses - 46.3%
20 losses - 35.8%
10 % account risk:
5 losses - 59.0% account balance left
10 losses - 34.9%
15 losses - 20.6%
20 losses - 12.1%
I think these numbers speak for themselves. There’s a very good reason to never risk more than 3% of your account and personally when my account balance gets to a happy place, I’ll definitely move to 1% risk.
During account buildup I feel that 2.5% is a level which I can feel comfortable with.
I think it’s very noteworthy that a string of only 10 consecutive losses with 5% risk reduces your account to only 60% of what it was, and even just five losses in a row melts it to under 80% of original balance.
Leverage isn’t the killer. Poor risk management is.
