I recently conducted a poll asking the question:
“How much do you risk per trading event, expressed as
a percentage of your trading capital?”
The results are in and my conclusion is this — most of
you are crazy! If you were truthful (always a big IF), the graph below shows
the results:
The mean risk per trade for the 641 respondents
was 3.2%. Are you kidding me? Combined with other data sets I have collected in
polls, a risk per trade of 3.2% pretty much guarantees that
you will have a 50% -plus drawdown and likely walk away from trading with
a wounded ego and bank account.
Let me give you a sneak peak of future posts: If
you are risking 5% of your capital per trade and have a win/loss ratio of 50%,
during the next three years of active trading you will experience a 30%
drawdown at least 15 times. Sound fun?
Just so you know, most people
who trade for a living risk less than 1% of their capital in a trade, 2% in a
maximum commitment.
I will have more to say about risk management in
the coming weeks, but for the 26% of respondents who reported risking more
than 5% of their capital per trade, let me say just two words to you — you’re
history! The 50% of respondents who risk less than 2% of their
capital per trade have a fighting chance.
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