A trader doesn't need to know how much he's risking by using the risk formula everytime. For a large 50 or 100 crore trade, 28% risk and 29% risk are different but for a normal trader, it doesn't matter.
So, calculating the risk everytime is a bad idea. The easiest 1-step guide I use to calculate my risk is:
STEP 1: Enter a trade with 'x' capital.
If small to medium size movement worry you then you need to lower your overall risk(by cutting leverage or capital, moving stoplosses etc)
If a small to medium size movement against your trade makes you say "meh" then you must increase your risk(increasing leverage or capital)
Simply put, if you're too worried then you need to lower risk and if you are not worried at all then you must increase your risk. The ideal solution is to find a balance between them. It sounds really hard but it's easy.
Example: If trading 10 contracts makes you say 'meh' and 20 contracts gives you anxiety then find a balance between them ->around 13-15 contracts.
This always works for me.
The reason why you need to find a balance: You won't stick to your system if you're risking either too high or too low.
i) Too high risk worries you if a trade is going against you. Even though you might be right or wrong, you live in a perpetual state of worry. All of a sudden there will be that "one" trade where you loose more than you calculated. Eventually, you'll end up sad and depressed in one way or another ,especially when the trade goes against you ->you get out early -> trade goes in your initial direction. Yes, I know the feelz when the happens :annoyed:.
ii) Too low risk doesn't force you to stick to your system. If a trade is moving against you then you'll be like " it's okay! I am not risking much. Let's stay in" even when your system is screaming for you to get out of the trade. So, risking too low is also dangerous and you'll loose more than you think because the small movement keeps on adding up and becomes huge.
Isn't it surprising that you'll always loose more than you think in both cases? :clapping::clap::rofl::lol:
So, calculating the risk everytime is a bad idea. The easiest 1-step guide I use to calculate my risk is:
STEP 1: Enter a trade with 'x' capital.
If small to medium size movement worry you then you need to lower your overall risk(by cutting leverage or capital, moving stoplosses etc)
If a small to medium size movement against your trade makes you say "meh" then you must increase your risk(increasing leverage or capital)
Simply put, if you're too worried then you need to lower risk and if you are not worried at all then you must increase your risk. The ideal solution is to find a balance between them. It sounds really hard but it's easy.
Example: If trading 10 contracts makes you say 'meh' and 20 contracts gives you anxiety then find a balance between them ->around 13-15 contracts.
This always works for me.
The reason why you need to find a balance: You won't stick to your system if you're risking either too high or too low.
i) Too high risk worries you if a trade is going against you. Even though you might be right or wrong, you live in a perpetual state of worry. All of a sudden there will be that "one" trade where you loose more than you calculated. Eventually, you'll end up sad and depressed in one way or another ,especially when the trade goes against you ->you get out early -> trade goes in your initial direction. Yes, I know the feelz when the happens :annoyed:.
ii) Too low risk doesn't force you to stick to your system. If a trade is moving against you then you'll be like " it's okay! I am not risking much. Let's stay in" even when your system is screaming for you to get out of the trade. So, risking too low is also dangerous and you'll loose more than you think because the small movement keeps on adding up and becomes huge.
Isn't it surprising that you'll always loose more than you think in both cases? :clapping::clap::rofl::lol:
Easiest, 1-step guide to calculate how much you can risk in a trade.
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