How Much Should You Risk Per Trade?
Risk per trade is a percentage of total capital allocated to a position.
Maximizing returns while limiting risk is one of the many challenges we face as traders. Risk too much, and you could face a massive drawdown or blow your account. Risk too little, and your returns will disappoint.
It seems complicated, but it all comes down to how much you risk per trade.
Max risk per trade
Max risk per trade is the percentage limit that you are allowed to risk on a position i.e. you cannot place a trade that would exceed this value.
What should this limit be?
You should NOT risk more than 2% of your trading capital on a single trade.
With a $10000 trading account, this would mean a max risk of $200 per trade. With a $50000 trading account, this would mean a max risk of $1000 per trade.
It is essential you remain disciplined and never break this max limit.
Average risk per trade
To calculate average risk:
Total risk taken / number of trades = Average risk per trade
How to determine optimum max risk
Although 2% is an excellent general suggestion, the optimum risk limit differs from one approach to another. For example, a scalper will likely risk less than 2% due to frequent trading.
To objectively determine what works best for your trading:
- Backtest your strategy with different position risk limits.
- Track the results.
- Analyze the overall performance (profit) and the largest drawdown during that period.
- Compare each option and decide what risk you are willing to take (drawdown) relative to the reward (total return).
Many traders before you have failed to conquer the market because they neglected money management principles. Thankfully, you are not one of them.
Keeping within your limits on a trade-by-trade basis is the cornerstone of successful risk management, so focus on that and you will be well on your way to consistent profitability.