Risk meter, how much should you risk?
Risking 2% can quite literally save your trading account. By risking too much your trading can be at risk of large drawdowns. But why is this? We searched across the interweb and found several reasons to keep risk low:
Surviving losing streaks: Risking 2% per trade allows you to withstand a series of losses without depleting your account. For example, starting with $20,000: If you risk 10% per trade and lose 19 trades in a row, you would be left with only $3,002. Whereas risking 2% would leave you with $13,903, a 30% loss of your initial account.
Preventing large drawdowns
By capping risk at 2%, you can avoid significant account drawdowns, which can be devastating to your trading career. A 10% maximum drawdown limit, for instance, would require a much smaller account size to maintain the same level of risk.
Proper risk management
The 2% rule is a simple and effective way to manage risk, making it accessible to beginners. It’s a basic principle that can be applied to any trading strategy, regardless of market conditions or account size.
Avoiding over-trading
Risking too much per trade can lead to over-trading, which can exacerbate losses and increase the likelihood of account destruction. By limiting risk, you’re more likely to trade with discipline and avoid impulsive decisions.
Focus on trading skill improvement
As your trading skills improve, you can gradually increase your position size and risk percentage, allowing you to take advantage of better opportunities while still maintaining a safe and sustainable trading approach.
In summary, risking 2% per trade provides a balanced approach to risk management, allowing you to:
- Survive losing streaks.
- Prevent large drawdowns.
- Practice proper risk management.
- Avoid over-trading.
- Focus on improving your trading skills.
This approach is applied to any trading strategy and account size. Making it a versatile and effective principle for traders of all levels.
