How much of your portfolio should you risk in a trade? I've seen people say 1%, 2%, or 5%. I always thought that made no sense for someone like me with little money.
Whenever I opened a position, I always risked 30â60% of my portfolio. I had just a few hundred dollars to my name, so you can understand why I had no choice but to take on more risks.
I knew better than to never risk 100% of my capital in a trade. I never did, until one faithful day.
My name is Investor Ben, and this is my story.
The Master Plan
I joined a Discord server where like minded enthusiasts grind and share alpha with each other. I've shared stuff that was useful, and I have also benefited from the research of others.
One day, one of the guys brought up the idea that we should study the activities of Elon Musk and the times he tweets about DOGE. After days of research and analysis, we concluded that Elon would tweet about Doge within 3 days.
Everyone agreed to risk 1â2% of their portfolio and no more than 5%. The guys didn't know I was poor and broke, so they couldn't know that that idea wouldn't work for me.
With all this analysis, I thought this would be my biggest opportunity. After all, I used to hear people say to "go big" when the right opportunity came along.
I Had To Make It In One Trade
I had just $570 in my portfolio at the time. If I risked 5%, the profit wouldn't make any sense to me. And since I trusted these guys, what stops me from going all in?
I opened a 10% long with $200. DOGE dropped by 1%, leaving me at a 10% negative. I added $100 to my position that evening.
The price of DOGE was stuck in a 1% range the next day. By evening, I slid the bar to the far right, going in with 100% of my portfolio. This was my moment to make it in one trade, I thought.
I Got The Biggest Shock In My Trading Career
The third day, by morning, the DOGE price had dropped by 3%, leaving me at a loss of 30%. I kept the trade on, believing there would be a reversal soon.
I was doing the dishes when my phone vibrated. I got a notification from Binance that I was at 80% negative, and that I should add more collateral or risk getting liquidated.
I quickly opened the chart to see what was going on. DOGE price moved up 3% at that point, putting my unrealized loss at 50%. I was relaxed a bit and felt this was it. The reversal is about to happen.
I was begging in my heart. "Elon Musk, please make this tweet". But there was nothing.
I was still with my phone, looking and hoping the chart would go up, when I had what I'd call a nightmare. There was a market wide sell off. The price of DOGE suddenly dropped by 12%. Before I could close the position to save some money, everything was gone.
I was pressing the close button repeatedly, but nothing happened. Whether it was network issues or a lag on the app due to lots of activities, I didn't know.
Two minutes later, the app was working fine. I looked at my balance, and it was zero. All the money is gone. I felt numb and stupid. It was as if someone had died. Where do I start?
Two days later, after this incident, Elon Musk tweeted about Doge. My guys lost some money the same day as me. But because they risked little money, they had more money to enter the trade again and make some gains.
The LessonsÂ
What happened to Caya is typical, and a great lesson in risk management. Were you able to identify the areas where he made mistakes and what he could have done?
Let's consider some of them
Basing trading decisions on Elon Musk's tweet is not a solid idea
He should have risked around 5% of his portfolio and piled others
No matter how sure of the trade he was, he should have used a stop loss
When the price of DOGE dropped and he was 50% down, he should have cut the loss and found out why DOGE was dumping.
Did you find other lessons? Do share them below.
