Generally accepted guidance suggests anything up to 2% of your account balance should be risked per trade depending on who you listen to or what you read. For me, this is way too simple, there are too many variables that need to be considered before establishing a set of parameters to decide how much to risk per trade. One has to consider such aspects as account size, experience of the individual trader, risk tolerance, market conditions etc.
How do I determine how much to risk per trade? I will first explain where I am in my personal trading mastery journey. On a rolling 12 month basis I have been profitable now for approximately 9 months in what has been a 3 year journey. The first 2 years I have had very large draw downs in my account balance! There are a lot of reasons for this, will leave that for another post.
I am a long way from mastery and therefore I know I should not be risking the same amount of my trading capital as someone who has reached mastery and my rules reflect this fact.
My strategy is to tie the amount I risk per trade to:
the time frame for that trade I am taking
the value of my trading account
Let me explain the logic as to how this works. I believe it is definitely something that any progressing trader can consider if they are looking for a system that is methodical.
Time frame impact on risk per trade
Most amateur traders will agree with me that the smaller time frames are much more challenging when it comes to being successful. It requires a lot of emotional power to navigate the psychology of losses and the frustrations that lower time frame trading brings, particularly around the first 20-30 minutes of the market open. I factor this into my amount to risk.
My view is that as you move up the time frames you are prepared to risk more of your capital on the basis that the higher the time frame the more accurate trading results can be. This is certainly what I have found from an analysis of my trading results.
The volatility of the shorter period time frames can quickly have you stopped out if you are trading 1% of your account on a trade on a 2 or 5 minute chart. As a learning trader the shorter time frames give you shorter decision making time! With a long way to go in my trading journey (thankfully I am realistic with myself) I risk from 0.20% of my account on a 1 minute chart up to 0.75% of my trading account balance on a daily time frame chart.
A risk of around 0.2% doesn't sound much but considering that my results clearly show I am better at higher time frames for now, my account balance would be a lot lower if I wasn't applying such a methodology. The aim of trading, while we are learning, is preserving our capital until we reach profitability. Despite having reached that milestone a while ago I am trying to keep myself grounded so I progress on a steady basis.
Account value impact on risk per trade
Another concept is graduating the amount of risk tolerated per trade as your account balance grows. As my trading account grows in value I set new risk percentages per trade to reflect the fact that my account has grown. If your trading account has been growing from one monetary target size to another by following trading rules, your trading ability and progression is proven.
Let us look at my rules for setting the risk per trade.
I have a relatively small account but I have access to leverage. Based on each time frame, as my account grows gradually in value, so does my risk per trade. My plan is to continue with steady progression until I have my target account size of GBP 100,000. Account sizes actually become academic when you have leverage as even my account of almost GBP 10,000 allows me notional trade sizes of GBP 200,000 with 20x leverage. Calculations of optimal trade sizes is a different topic. However, with each new milestone in account value being reached I am rewarding myself with the prospect of risking more per trade with the resulting opportunity of larger gains.
The point here is that skills, risk and success are all aligned. I am risking small percentages, especially on lower time frames while I continue mastering this trade, which keeps me from blowing my account. Since applying this method before it has really helped a lot.
Reward yourself with risking more only if you have earned the right to.
How is everyone else managing their risk sizes, is my method overly complicated?
Trade Clearly!
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