Following up on yesterday’s post to address the crux of Abhishek’s question.
What percent of your account should you be risking per trade?
This is one of those questions where there aren’t any right answers, but there are a whole lot of wrong ones.
The way I like to approach this is: what’s the smallest number you can use and still accomplish your goals?
In general, risk is trader-dependent. There are too many factors to have a one-size-fits-all answer.
Here are some factors I’ve used over the years to determine the risk to use per trade in one of my strategies:
- My age – in my younger trading years, I could afford to risk more since time was on my side
- Tail risk – does the strategy have significant tail risk? If so, tend towards a lower number than you think
- Strategy quality – does the strategy have the ability to scale? If I think so, I’d start with a lower number with the plan to increase over time
- Win rate – definitely an overrated stat, but still, strategies with a lower win rate are psychologically difficult to trade
- Historical drawdowns – how deep are the drawdowns? How much am I willing to go in the hole in the future? If they’re large, then I’d tend towards a lower percentage
- Smoothness of the equity curve – the most underrated stat!
- Confidence in the above factors – you’ll very likely have varying levels of confidence in the previous factors. If my confidence is fuzzy, I’d start with a lower number and increase as things come into focus
If this feels like a wishy-washy answer, good! That’s the right takeaway.
Risk is a personal decision, and when in doubt, risk a lower amount than you think is prudent.
Risk is one of those things that should keep you up at night a little.
How might you be fooling yourself? Overconfidence is a far bigger problem than underconfidence.
Thanks for the question, Abhishek!
-Dave
