Do you want ME to help YOU with your trading?
Video Transcript:
Most traders don’t blow up because of their trading strategy, but because of money management. More specifically, because they change their risk at the worst time possible. So, in this video, I’ll show you exactly how much to risk, when to increase your risk, when to decrease it, and how not to mess it up. If you are growing a small account, then 5% sounds a bit aggressive, but if you really want to turn a small account into a big one, it’s difficult and risky. If you want to do it, you need to risk quite a lot, which I think 5% is more or less okay for this purpose. If, on the other hand, you have a huge account and you want to live off it, then you don’t want to risk too much. It could be, for example, half a percent per trade. If you are somewhere in between, then 2% risk per trade seems like an optimal risk.
Now, an important thing here, and I really want to stress this out, is that you want to risk the same amount for each trade. What people often do is they risk more on trades that they trust and less on trades they are not so sure about. But in my opinion, some of the trades that don’t seem that great in the beginning sometimes end up being beautiful trades. And if there is a trade that you believe in so much and risk a lot of money on it, that one can turn out to be a loser. So for that reason, my advice is to risk the same amount for each trade.
Now, another thing that I like to talk about is when to increase risk. I’ve seen this many times: a beginner starts trading my strategy and has good results. After a period of many winning trades, they feel like they are invincible and that they should increase their risk. They do that, and right after that, they hit a losing streak on top of that, with increased risk. So they blow up their accounts. My advice is: do not increase your risk after a winning streak or while you are in one, because usually after a winning streak, what comes next is a period where the strategy doesn’t perform so well, goes sideways, or even makes a small drawdown. If you decide to increase your risk at that point, for example doubling it, then that drawdown will not look small it will look much worse and much more painful.
Instead, you want to increase risk when your equity goes sideways or slightly up. Nothing extreme, not a huge drawdown, but something stable. That is the right time to increase your risk. That said, you don’t have to increase your risk at all. If you are trading with 2% risk per trade and you are comfortable with it, then just stick to it. But if you do want to increase it, for example from 1% to 2%, don’t do it during a winning streak.
Now, another thing I want to cover is when to decrease your risk. Typically, you want to do this when you are in a large drawdown bigger than what you have historically experienced. What you see here is an equity chart, and this line shows a standard drawdown, something typical for your strategy over the long run. If you go beyond that and enter an excessive drawdown, then you want to decrease your position size, for example to 50% of your normal size. What many people do in this situation is they stop trading completely. They review everything, rethink their strategy, and sometimes even change it. But what I recommend is not to stop trading during an excessive drawdown, because what is most likely to happen next is a period of winning trades. If you pause your trading for too long, you will miss that recovery phase.
So yes, review your trades and analyze what went wrong, but keep trading with a smaller position size to regain confidence in your strategy. Once you see that you are back on track and the strategy is performing again, you can increase your risk back to normal and continue trading with your standard position size.
All right, guys, I hope you liked the video. If you want to learn more about the way I trade, or if you want to get access to my custom-made trading indicators, head over to my website, trader-dale.com. Click on the button that says “Trading Course and Tools” and it will take you to a page where you can browse my trading education and custom-made tools. Thanks for watching, and see you next time. Until then, happy trading.
