One of the biggest reasons new traders fail is poor risk management. It is important that not only do you find the right setups in the market, but you understand that if those setups don’t play out, and you hit a losing streak, that your capital doesn’t vanish!
Overleveraging is the most common case of poor risk management. This is throwing 10-20% of your account (or more in some cases) at a single position. Meaning 5-10 losing trades in a row will bury your account.
It would be naive to think even the best traders in the world do not have losing streaks. Because they do! This is where it is important to understand the principal of drawdown. Drawdown is a measurement of the peak of an account balance, to the lowest point, until that balance is recovered again.
Let’s take a 100k account – over 6 months it increases to 150k, but months 7-9 it drops to 120k, before recovering back to 150k in months 10-12. The max drawdown of this account would be the biggest % drop in balance, which here would be from 150k down to 120k (-20%).
A drawdown of -20% requires a gain of 25% to recoup. The bigger that drawdown the harder it is to recover. A loss of -50% means you have to now double your money to recover!
Here, we work in percentages. That is because using flat lot sizes just doesn’t work, another common error traders make. For example – one trade may have a 20pip stoploss, and another may have a 200pip stoploss. Using flat lot sizes makes your risk different on the two positions – position 2 will have a 10x bigger risk! The key is to use a lot size calculator like the one we have in the trade room. Make sure each position has a flat PERCENTAGE risk, based on account balance. Using our trade alerts we advise a 2% risk on each trade.