I will never recommend risking more on a trade than 1% of your account. I understand that many people will say you can risk up to 2% per trade safely, but my experience is that professional traders don’t risk more than 1 % of their account, and more often they risk much less.
The problem with risking more than 1% is that it introduces more volatility into your system, and that volatility increases exponentially as the % increases.
You could fairly easily lose five trades in a row trading any system. If you took those trades over the course of a day, then you are now down 10-15% of your account, depending on how much you have risked per trade. You would then be in a situation of being bummed out, frustrated and worried about your losses rather than focusing your mind on what you need to focus on such as reducing your risk in a trade.
Something you will hear often is that most traders or aspiring traders are people who are successful in another area, and move over to trading to find a new challenge. The reason for that is that those sort of people are usually the only ones who actually have enough money to trade properly straight off the bat. For everyone else, they need to find another way to build their account to a level that makes their level of profit worthwhile.
Many newbies, and not-so-newbies entertain the idea they can risk a relatively large percentage of their account early on when their account is small. They rationalise that as their account grows, they will reduce their risk accordingly.
The thinking is that they don’t currently have enough money to trade with that could realistically provide an income, so they will have to take large risks early to build up their account.
Think about the annual return the trader who is being paid big money to trade your superannuation fund is making. He or she is being paid a lot of money to make 6-10% or so a year.
And here you are thinking you can make a few hundred percent a year to build your account up, and then slowly taper off with your risk?!?
If you think about the sums further, let’s say the best scenario is that you make 30-40% a year return on your trading account. How much money will you need to trade with in order to achieve an acceptable standard of living if you make 30% a year on your money?
The fact is the required size of your account would be much bigger than you anticipate.
The other issue, and one that is pivotal in my mind, is that you need to trade how you want to continue. There is no point in developing discipline and consistency, if you are then going to mess with various aspects of your system and/or position size down the track or as you go along.
You have at some point thrown your consistency out of the window with that methodology, and you will most likely struggle from that point.
It takes considerable time to teach yourself what you need to know and execute to trade profitably consistently, and it takes time to train yourself to execute your strategies and plans consistently and with discipline. If you are playing around with your risk levels, you will find it very hard to do that.