Little Known Tips To Wipe Out Day Trading Losses Guaranteed

Studies have shown that you should never risk more than 2% of
your float on any trade Why 2%? Well, in fact, many day trading
professionals will tell you that 2% is too much They’ll risk 1%
or even as little as a quarter of a percent on any trade
Whatever percentage you pick, the idea is to ensure that no one
trade is really going to affect your day trading float,
positively or negatively
Many traders don’t appreciate how powerful this rule is By
simply changing the amount of capital you risk in your day
trading, you can turn a system from returning 10% to returning a
100% per annum Now, by increasing risk, and investing more in a
trade, you do increase your chance for reward However, you also
end up increasing your draw down as well You may want to do a
bit of testing to understand the importance and the power of
changing this one variable I always recommend that you never
exceed a 2% risk Sometimes it is difficult to understand this
simple fact; keeping your losses small will help you be
successful in day trading
Let’s look at an example of the 2% rule in action If we had a
day trading float that was $20,000, using the 2% rule we set our
maximum loss to be $400 on any one trade With this maximum
loss, we could have a string of 50 losses in a row before we had
no more capital left to trade with In most day trading systems
the chances of getting 50 losses in a row is very, very slim
However, the chances of going broke are even smaller, because
when you implement the 2% rule correctly, the calculation is
based on the current float size
So, initially 2% of $20,000 is $400 However, if we experienced
a loss first off, our day trading float would now be worth
19,600 dollars We then calculate 2% of this new value, and set
our maximum loss for our next position 2% of $19,600 dollars
would be $392 You can see that each time we experience a loss,
our next maximum loss would shrink As our portfolio increases
in size, we’re happy to take on more risk as well
I thought I’d play around with a few of the figures just to see
what would happen if we had a string of six losses in a row
After receiving six losses in a row, our day trading float would
have decreased to only $17,717 After six successive losses,
we’ve only lost $2,283 Now, that’s managing your risk
The fact that the loss is such a small component of our day
trading float makes it much easier to gain back those losses In
this example, we’ve lost a little bit more than 10% To gain
back that loss and break even, we’ll need to make 111% Now,
imagine if we didn’t have good money management in place and we
had a draw down of over 50% If we have a draw down of 50% and
we loose it, we need to make 100% return on our remaining
capital to break even You can begin to see the how a larger
draw down makes it more difficult to recover from losses
Novices often risk more than 2% Even if you’re starting out
with a small day trading float, you should practice good money
management You need to position yourself so that you can endure
long strings of losses, and maintain your day trading system
When the market does turn around, you’ll be in the market
positioned to capitalize on it’s moves That’s what setting the
maximum loss is all about, it keeps you in the market, allowing
to you to keep your day trading system going If you can survive
some losses in your day trading, the profits will come
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