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c10 JWBK182-McDowell April 25, 2008 16:11 Printer: Yet to come

CHAPTER 10

Using the Two

Percent Risk

Formula and

Proper Trade

Size Formula

E

ffective risk control requires that you do a little math and learn a

few equations. In the last chapter you learned about the risk-of-ruin

tables and using the optimalfequation to find out what the best

percent of capital is to risk on any one trade. In this chapter, we’re going

to cover a few more equations to help you determine the right trade size to

keep your risk in line.

WHEN CONTROLLING RISK, THERE ARE

THREE VARIABLES YOU CAN PLAN TO

CONTROL

1. Entry (where to get in)


2. Exit (where to get out—be sure to take into account market liquidity)


3. Size (in shares or contracts)

IT’S A NUMBERS GAME

Money management is all about numbers and probabilities, and the differ-

ence between being a winning trader and being a losing trader sometimes

comes down to a few simple equations.

In this book you’ve seen how the risk-of-ruin tables, win ratio, payoff

ratio, and percent of capital at risk determine if you are in danger of losing

it all. The good news is that you can adjust these factors to work in your

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