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Little Known Tips To Wipe Out Day Trading Losses Guaranteed
By: David Jenyns
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
11.1%. 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.
About the Author:
Discover BIG profits from the market by downloading your FREE copy of David's
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