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Trading Lesson: Risk Management Formula

January 26, 2015


Risk Management & Position Sizing Formula


1. Never lose more than 2% of account in any one trade.
2. Never have more than 10% of account in any one trade.
3. Never have more than 70% of account in all trades.
4. If account is down 15%, stop analyze and refund

ACTUAL NUMBERS ARE EXAMPLE ONLY – You have to decide what percent you are comfortable with as risk and make it uniform to the current account balance when planning / placing the trade.

For legal reasons I put it like this-

Consider not losing more than around 2% of total account in any one trade.
Consider not having more than around 10% of total account in any one trade.
Consider not having more than 50% of total account in all trades.

Example: Position sizing
If the stock drops to my exit area or stop out point,
1 contract of my option will lose about lets say $125……

2% of my total account would = $500 (25k x 2%)
Therefore I can possibly do a max of 4 contracts. (4 x 125 = 500)
Total to buy 4 contracts = $600each contract x 4 = $2400

10% of my account = 2500 (25k x 10%)
Trade is $ 100 less than the max I want to put in each trade.

Now consider do I have at least half or 70% of account buying power left.

Again for legal reasons this is an example only, but very similar to what I use for accounts between 10k to 100k

If account Net Liquidity was to drop what %, do you stop trading?

When to start taking profit?
If I see a trading post x$, I take at least a portion of the trade off to realize profit. Ex: $100 or more showing in profit and I have 5 contracts open, then I might take 2-3 contracts off. And adjust stops on rest.

Up 100% – Take half off the table = risk free trade.

Try to protect break-even point as soon as possible.

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All investing and trading in the securities market involves a high degree of risk. Any decisions to place trades in the financial markets, including trading in stocks, options or other financial instruments, is a personal decision that should only be made after conducting thorough independent research, including a personal risk and financial assessment, and prior consultation with the user’s investment, legal, tax and accounting advisers, to determine whether such trading or investment is appropriate for that user.

5 Replies to “Trading Lesson: Risk Management Formula”

  1. Aurimas Utka says:

    This is very helpfull (vital) lesson in trading. Thanks Gino.

  2. ken says:

    thanks gino, i find these tips very useful. i felt like i’ve become a better trader since you brought up the notion of realizing profit by closing a portion of a position and having the rest ride “free”

  3. Kalaivani Arun says:

    Thank you Gino!

  4. Joseph P. says:

    Great insight. Thanks! This definitely helps me in building my own rules to live by.

  5. Daniel Brodhead says:

    Thanks for the great reminders.

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