You know I risk a maximum of 0.5% of my total capital on each trading operation.
This may seem like little to many, but you must realize that if I were to lose 10 trades in a row, it would result in a 5% loss of the entire capital. That is a significant loss and not easy to recover from.
Risking 2% per trade would mean 20% of the total capital. And if recovering 5% is already hard, recovering 20% is much more difficult.
The key, therefore, lies in the amount of money. The vast majority of traders operate with a small account, and unfortunately, thereâs not much you can do with that.
When you have a small account, itâs easy to break the rules of money management, leveraging more than you should in an attempt to make bigger gains.
This might work out well a couple of times, but if you want to make trading your profession, you must follow money management rules, or sooner or later, one trade will wipe you out, leaving you with nothing but regrets.
There is no quick money in trading. Sure, you can âalmost retireâ if you catch a big trade, but generally, this happens rarely, so youâll need a plan to gradually take money from the market while losing less each time you take a hit.
Rest assured, the market will try to take your money by all means, especially using its psychological weapons.
You might trade correctly according to your rules for a while, but be sure that the market will do everything possible to make you break those rules, even just once. And that one time will be enough to trigger a series of mistakes, costing you not only the profits you worked so hard to earn but even the last euro in your account.
Have you ever noticed how you manage to accumulate a decent amount of capital, scraping a little profit on each trade, only to lose all of those hard-earned gains in one swift trade?
The market knows your weak point: your mind, your lack of iron discipline. The moment you start overthinking, youâre lost. You have to trade mechanically, like an automaton.
But back to the point. Even when risking only 0.5% per trade, itâs still very difficult to make money if you donât let your profits run.
Of course, letting your profits run is the final step in the stages of becoming a trader, and without a doubt, the hardest.
Why?
Because many times, youâll regret not letting your profits run longer, and at other times, youâll wish you had closed the trade earlier.
So thereâs no standard point for closing trades. Youâll never know how far a trend will go. Youâll never be able to predict its full course.
Weâre often told to enter trades that offer a 1:2 or 1:3 risk/reward ratio.
First, you donât know which trades those will be until they develop.
There are also traders who claim to have an 80% success rate. But of course, if each win nets them 10 euros and they lose 200 euros in one trade, it doesnât matter if they have a 99% success rate.
It all comes down to the same thing: within your winning trades, youâll have a group with minimal gains (which wonât do much for you), another that moves further but then reverses and hits your stop (youâll regret not closing earlier), and the ones that make a big move, which are the ones you should be chasing (the ones you regret closing too early).
But of course, even when you manage to join a strong trend, itâs clear that at some point, it will stop and reverse.
And youâll never know exactly when that will happen. Sure, technical patterns, data, or macro news might give you a clue, but itâs never certain. Whatâs frustrating is that almost always, what you predicted happens, but later than expected. Thatâs why one of the key traits of a good trader is the patience to wait for the right moment for everything.
So, if youâre risking 0.5% of your total capital, youâll need to consider your win rate. Your broker provides a history for this.
Then youâll need to look at how many of those winning trades were worth it, how many reached a point where the profits were satisfactory, and how many could have been left to run longer.
Based on all this, youâll need to establish a more realistic ratio than 1:2 or 1:3.
Perhaps your trading history will tell you to close all trades that reach a 1:5 or 1:10 ratio.
Or maybe youâll prefer to collect those offering a 1:20.
All this will depend on you, keeping in mind that the greater the risk/reward ratio you wait for, the longer it will take for a trade like that to appear, and the more false entries youâll have to endure.
Then thereâs the total amount of money you have in your account. If youâre risking 0.5% of 5,000 euros, you know that every time you lose, youâre down 25 euros. If you have 4 losing trades in a row, thatâs 100 euros gone.
So, keeping this in mind, along with your win rate on good trades (with acceptable moves within the positive ones), youâll know which trades to wait for, or rather, which risk/reward ratio works best for your account to grow in a steady upward line.
But what you need to be clear on is that not all winning trades will be validâonly a portion of them will be.
Now itâs your turn to start crunching the numbers.
