How much risk to take in a trade?

 The most frequently asked question in a trading discussion forum is, how much risk should a trader take? New and conservative traders set a standard of 1 to 2 percent, while aggressive investors sometimes suggest taking a risk of up to 5 percent.

 

What you need to understand is that risk tolerance is not a one-dimensional task. Of course there are some rules to follow but in the long run it can be even more profitable due to your personal preferences.

Risk tolerance is the amount of money you can afford to lose in order to make a profit.

Those with stable incomes or experience in the financial markets can be aggressive, while those with other financial obligations and limited trading experience often take the less risky path to profit.

Unfortunately, this does not apply to all traders.

Many new investors are tempted by quick and easy profits because they have limited trading experience, often taking risks beyond their means.

When you risk more money than you can afford, if it sinks, it will damage your trading mindset and deprive you of making the right trading decisions. Then in the end you will write your decision based on the balance of your account rather than the training you have taken.

So, how do you know how aggressive you are in every trade? Here are 5 things you should pay attention to.

 

1) Lifestyle

 

Do you have a steady income? If you are receiving a regular salary, you will not be affected by the losses here and there and you can focus on your trading skills.

If your only source of income or debt repayment and other financial obligations is trading profit then you make decisions based on greed and fear and you get stuck in small position size.

2) Trading capital

 

How much have you invested in your trading business? A large trade account can hold a large position per trade.

Similarly, traders with small accounts should not trade in such a way that small fluctuations trigger margin calls.

 

3) Time limit

How long do you plan to do business? For long-term trades, the size of the position is usually small because they can withstand fluctuations.

If you do day or swing trades you can probably increase the size of your average position.

 

4) Experience

If you have been trading for a long time, you can be more confident in your trading trends and decisions.

In fact, increasing your position size may be the next step in improving your trading game.

However, if you are new to the market and you are still making emotional decisions then a small position size may be a good option for you.

 

5) Trading confidence

If you have a few months or years of trading experience, you may have seen days when you felt you were out of sync with the market.

For example, you may be stuck on a trading route or in the middle of a losing bet and you may not feel comfortable until your investment is returned.

In that case, there is no shame in reducing the amount of risk in your trade and see how it works for you. When you are worried about your balance, forget about how well you are implementing your trading plan and stick to it.

Then, you can gradually increase your average position size and return to your trading rhythm.

Find a happy balance that can make significant changes to your account and at the same time enable you to focus on improving your trading skills and eventually you will find a profitable way.

Remember there is no risk taking formula. You can read various books and blogs and ask in other trader forums but in the end how much risk you take depends on your risk tolerance.