Risk By 1% Split Positions
How Splitting Your Risk Can Save Your Mental and Physical Capital
I used to love holding positions until my intended target without adjusting my risk or the risk that I had left on the table. Yes, I know this was not the smartest thing but, we learn every day, right? So, for example, if I were risking 1% of my total capital, I would attempt the complete 1% until my intended target, whether 3% or 10%!! I would NEVER adjust my risk! This approach was problematic.
Now, as a beginner, you might be thinking about what the problem with this approach is. The problem is apparent, and it leaves you with all your cards turned; it leaves you exposed and way more than you should ever be. Although it may only be that 1% risk, that risk could have been 0% (also known as risk-free) if you had adjusted your stop loss or cut the position by a quarter or a half, dependent on the volatility in the market at that time.
We will go into these topics in this article in depth because you must remember as much as it is your physical capital at risk, it is also your mental capital at stake – the one may be more devastating to lose than the other. So why put it at risk at all?
So what does it mean to split the position?
There are various ways to split a position. Many traders tend to break up their position by placing multiple positions that add up to a certain percentage of their entire trading capital. The problem with this method of splitting parts is that it puts a trader at risk of risking more than the intended risk percentage. The other downside to this is the mental capital.
Mentally, when multiple positions go into drawdown and end up hitting your stop loss, you feel and look like you have lost more. Mentally, you perceive the failure to be more because all of these positions hit different prices and represent the position going against you. It may just be a stop hunt or spreads taking effect in the market. You tend to believe that your overall bias is wrong too.
Split the position
The idea of splitting the positions by cutting down on risk came at a point in my trading where I could not afford to be losing profits unnecessarily and realized it was the safest option for staying in control of my edge in the market.
Splitting the position meant whenever a trade was a certain amount of pips or a certain percentage in my favor, I would then move my stop loss to break even, and if the price continued,
I could then close half of my total position in profit. If I was 3% up, I could close half of the position and bank 1.5% of the trade. This method protected my physical capital and mental capital because if the rest of that position went against me, I would have lost absolutely nothing. I would either be at break-even for that particular trade or up a small percentage.
It will help if you understood the downside to this method if the trade is managed aggressively. Instead of banking a complete 6% on the trade, you only bank 1% – 2% if lucky. Mentally this has its effects too. It can cause greed to occur in your trading if you are not careful.
So if you are a beginner, my personal belief is that you need to take the little that you can from the market at each opportunity presented until you get to a level where you understand how to manage risk and money well.
Have a great trading week further, fellow traders!