P1:a/b P2:c/d QC:e/f T1:g
c14 JWBK182-McDowell April 25, 2008 16:23 Printer: Yet to come
Risk Management Rules to Choose From 143psychology is being affected by fear or some other emotion. Go back to
Chapter 4 to see if you can identify the problem and correct it.WHAT PERCENT OF YOUR TRADING
ACCOUNT WILL YOU RISK ON EACH
TRADE?We’ve covered a couple of ways to determine what percentage of your trad-
ing account can be risked on any one trade. Very often, you will reduce your
trade size and your risk exposure when you experience drawdown. Here
you will identify what the best method is for doing that. Check off all of the
following rules that apply: 2 percent maximum risk on each trade.
Using my average monthly win ratio and payoff ratio, mathematically
calculate optimal percent to risk using the optimalfformula for each
new trade.
Using my average monthly win ratio and payoff ratio, use the risk-
of-ruin tables to find the best percentage to risk to give me a
0 percent probability of ruin for each new trade.
After a drawdown, I will reduce the percent of risk by 25 percent. For
example, if I am normally risking 2 percent on each trade, after a draw-
down I will risk only 1.5 percent.
Other:WHAT TRADE SIZE WILL YOU USE?When placing a trade, it all comes down to trade size. That’s how you con-
trol your risk at your entry point. Following that, of course, is control-
ling your risk at the exit point. Determining your trade size is based on
calculating your commission cost, entry, exit, and risk percent you will be
using on any given trade.
Given that information, you can use your Trade Size Calculator to de-
termine the number of contracts you will trade. Or, you can manually cal-
culate the proper trade size using the formula in Chapter 10. Use Trade Size Calculator to determine proper trade size for every
trade.
Manually calculate proper trade size using formula in Chapter 10.
Other: