As with everything I say, this is not financial advice or a recommendation for how you should trade or how much to risk, as I have no idea your situation, account size, goals, risk tolerance, or anything else for that matter.
However, I will speak to how I trade the markets and view risk and how that transcends to our clients who follow our trades or will use auto trade once we are fully available to the public.
Rule 1: Establish a Risk Budget before starting to trade a strategy or system. This can either be a portion of an account ear marked to trade a strategy or system, or the entire account if notionally funding a separate account just for that strategy or system. I encourage this route, as keeping all the trades in one account and those only is cleaner...and better for my OCD.
A Risk Budget is simply the maximum drawdown you are willing to endure on your way to making a zillion dollars. And be realistic. Unless you are doing one of these "I'm going to turn 1k into 1m in 30 days" nonsense on Twitter that gets shilled.
Rule 2: Don't lie to yourself about trading or your risk appetite. Sit down and have a conversation with yourself. If you do it out loud it's better if no one is around though. But seriously, write it out. Know what your goals are and risk you will take all up in your face to get there.
Rule 3: This one applies to long (buying) options only, but I think it is a good rule in trading and investing, and in life in general - Assume every trade can go to zero (-100%) when determining your sizing. Again, this does not account for hedging a core position or having stops on, etc.
Even with stops, what if trading gets halted for say a 9/11 event and the market reopens below your stop. Well, they will grant your stop still. Just kidding, they won't and your kinda screwed then. At least on that trade. Well if you risked 1-2% of your total account on that trade, you can move on and you'll be just fine. What if you risked 25-50% of your account? Well, not so much doing well now.
Again, I am speaking of sizing 1-2% of risk and trading strategies that have a win rate of 65% or better and the average win is at least 1.5x, if not 2x or better the average loss size.
Even with this, you have to ask yourself what is the worst losing streak a system or strategy or algo has had (either in real-time or a result of back-testing)? Assume that can happen and possibly worse than that.
Trading and investing requires emotional control, or at least the ability to recognize that you are about to make a decision based on emotion only. Can this work for some? Sure, but trade like that all the time and let me know how it works out.
Until next time....
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