When it comes to money management, it seems a lot of us rely on a fixed percentage per trade.
IE) I am going to risk 2% of my account on each trade.
Well, what happens if you lose? Case and point: I start with 10K and lose, now I have $9,800 in my account...
What do I do on my next trade? Trade 2% of 10K again or 2% of $9,800? You can see that as you lose repeatedly, your capital will fall to 50% after 25 losses in the former....
But what if you were trading 2% of the CURRENT balance? Your entries get smaller each time, and your payout for a big win will be smaller. So to get back to breakeven, you could need 2 or 3 big winners if you are in big drawdown.
I am leaning toward 2% of the highest balance for all trades.... that gives me room for roughly 50 losers in a row....
IE) I am going to risk 2% of my account on each trade.
Well, what happens if you lose? Case and point: I start with 10K and lose, now I have $9,800 in my account...
What do I do on my next trade? Trade 2% of 10K again or 2% of $9,800? You can see that as you lose repeatedly, your capital will fall to 50% after 25 losses in the former....
But what if you were trading 2% of the CURRENT balance? Your entries get smaller each time, and your payout for a big win will be smaller. So to get back to breakeven, you could need 2 or 3 big winners if you are in big drawdown.
I am leaning toward 2% of the highest balance for all trades.... that gives me room for roughly 50 losers in a row....