A. %Risk/Trade
When it comes to capital management, let's begin by discussing risk. It is important to avoid putting all of your money at risk in your account. Determine the maximum percentage of risk that you are willing to accept for your account within a specified time frame.
For example, suppose your account balance is $100,000. It is important to determine the maximum drawdown level for your account, also known as the Maximum Drawdown (MDD). In this scenario, let's say you decide on an MDD of 30% (equivalent to $30,000 in currency) over a period of 3 months.
* Note: You can determine the MDD and time frame according to your personal preferences. In this example, we are just providing guidelines for easier visualization.
Why did we choose a time frame of 3 months? This duration allows you to take a pause and carefully evaluate your trading method, considering whether the trading results are positive or negative. If the results are not favorable, it is crucial to step back, make necessary improvements, and then resume trading. Do not waste your money if your trading journal indicates that you are trading ineffectively and experiencing losses. Without making any improvements, you will continue to lose your hard-earned money.
In this example, the MDD of 30% represents the %Risk/Account of 30% over a 3-month period. From that, we will go lower to finally get %Risk/Day as follows.
➔ %Risk/Month = 10%
➔ %Risk/Week = 2.5%
➔ %Risk/Day = 0.5%
The next step is to determine the %Risk/Trade number.
To determine the %Risk/Trade, you need to have a clear understanding of the average number of trades that appear in a day based on your trading checklist. Once you know the %Risk/Day, you can calculate the %Risk/Trade by dividing the %Risk/Day by the number of trades per day.
For example, let's assume that your trading checklist indicates an average of 5 trades per day. Then we have:
➔ Trades/Day = 5 trades
➔ %Risk/Trade = %Risk/Day : Trades/Day = 0.5% : 5 = 0.1%
This implies that you should limit your risk to no more than 0.1% of your account balance per trade. Consequently, the highest amount you can risk for each trade is $100.
* Note: You can utilize a Micro account to increase the distance for your stop-loss orders. A Micro account generally allows for smaller position sizes, enabling you to set wider stop-loss levels while still effectively managing your risk for each trade within $100. This can offer greater flexibility in your trading strategy and accommodate a larger stop-loss distance.
