The Daily Market Forecast... risk number
Friday’s Blog Results: The suggested short @ 4469.50 was a beautiful 39.75-point runner to the next level. How much did you get?
Today’s Lesson: How to find your “risk number.”
There is a popular risk management tool that uses a fixed percentage of your account size to determine per-trade risk (and ultimately position size). It’s simple to use and highly effective. Here’s how it works:
Account size: $10,000
Fixed Percentage: 2% (your choice up to 2%, higher is rarely suggested).
Per Trade Risk: $200
Stop Loss: $100
Position Size (contracts): 2
So why is this formula so effective? Because as your account grows the Per Trade Risk grows allowing you to trade larger size. Conversely, if you’re in a drawdown the Per Trade Risk will be less limiting your position size.
In fact, just to put it in perspective for you, using the numbers above you would have to endure 35 losing trades IN A ROW to hit your “no-trade limit” (less than $100 risk). Based on the Theory of Runs, assuming a sample size of 1000 trades and win percentage of 50% the most you’re ever likely to see is 10 losers in a row! Of course, the opposite is true as well, 10 winners in a row!
OK, that’s great from a mathematical view, but what about how you FEEL when you’re losing? This is much more important. Let’s say that you felt badly if you lost $1000. It’s not that you couldn’t afford the loss, it’s more the psychological aspect. You simply don’t like losing $1000! Given that “Risk Number” you would hit that after 5 losing trades in a row. This is very likely to happen, math-wise.
The answer is to find your personal “Risk Number” and make sure it’s less than 2% of your account. This way you’ll remain confident and have the capital and attitude to continue trading through the inevitable losing periods.
Today’s Best S&P Futures Turning Points:
Short Level: Sell 4430.25 stop 4434.75.
Long Level: Buy 4303.00 stop 4298.25
Trade well,
Mike Siewruk
P.S. Tired of trading alone? Need more quality setups? Learn how our team-based approach can accelerate your trading performance. Click here for FREE video training.