Losing Enough? by Trade Aptitude
Yesterday’s results: Neither trade idea triggered.
Today’s Best S&P Futures Turning Points: Nothing tradeable today.
The World Index: (+100/-100) jumps from +50 to +71 with all major world markets Bullish.
Catalysts: International Trade Balance @ 8:30. S&P Final Services PMI @ 9:45. ISM Services PMI @ 10:00. 10-year Bond Auction @ 13:00. Election Day.
Important: Check your broker’s policy on day-trading margin today. TradeStation requires full margin for the next 3 days! What does that tell you about volatility expectations?
Quick Tip: Losing Enough?
A popular formula for determining your risk on any given trade is the Fixed Percentage Rule. You pick a percentage, usually 2% or less, of your trading account and that is the most you can risk on each trade.
It works great because as your account grows your risk can increase giving you the opportunity for greater rewards. Conversely, if you’re in a drawdown you will be risking less until it ends.
While that formula is fine for the math side of the equation, it doesn’t address the psychological side. For most traders, at least until you’re elite, there is a dollar amount that bothers you to lose. I call it your Risk Number. It has nothing to do with your income or net worth. During my 16 years of teaching I’ve met very wealthy people who had very small Risk Numbers.
Make sure you’re risking the lesser of the Fixed Percentage number and your personal Risk Number.
Most people will focus on the maximum they can lose to determine their risk number. But the LEAST they can lose is never considered. After all, if you can comfortably risk $500 on a trade why would you explore your feelings about losing $100?
Here’s why you should: Losing too little can be as dangerous as losing too much. Why? Because when the amount you’re risking is too small you may not care. “Oh, it’s only $100, I’ll let it ride. I spent more than that on dinner last night.”
I like to play poker, and like in trading risk management is a critical factor. You pick the stakes you’re willing to play based on what you can afford to lose financially and psychologically. The stakes level will determine your potential wins and losses… and how much you care about the money.
If I play in a high stakes game I’ll probably lose. I’ll be too worried about the potential loss to properly execute my game plan. I’ll chicken out at times when I shouldn’t.
If I play in a low stakes game I’ll probably lose. I won’t care about the money, and I’ll start to take risks that I shouldn’t.
If I play at my stakes level, I won’t be worried about the losses, but the gains are important enough to me to play my rules.
Trading is the same. You may not care about the rules if the stakes are too low. Make sure your risk number is not only affordable to lose, but the likely gains at that level of risk are attractive enough to you so that you’ll focus and execute your rules.
Our trading teams focus on multiple strategies for day trading futures and high-probability candidates for swing trading options. Maybe you'll fit right in. You can try either or both risk-free.
Trade Fearlessly,
Mike Siewruk
P.S. Feel free to pass this along to your trading buddies. Share in the wealth!