P1:a/b P2:c/d QC:e/f T1:g
c14 JWBK182-McDowell April 25, 2008 16:23 Printer: Yet to come
144 A TRADER’S MONEY MANAGEMENT SYSTEMWHAT PERCENT OF YOUR TRADING
ACCOUNT WILL YOU RISK AT ANY GIVEN
TIME?The previous rule selections deal with per-trade risk percentages. This set
of rule choices deals with your total percent of risk on the entire account.
Again, you want to control the amount of total risk you sustain at any given
point. If you have ten trades on all at once, each risking 2 percent, you are
then putting 20 percent of your trading portfolio at risk, which may be too
much risk for you. Here are some ideas for total account risk rules: 6 percent is the maximum active trading account risk. Example: You
could have three live trades active, each with a separate risk of
2 percent.
10 percent is the maximum active trading account risk. Example: You
could have five live trades active, each with a separate risk of 2 percent.
Other:WHAT PERCENT OF YOUR TOTAL NET
WORTH WILL YOU RISK ON TRADING?Most would agree that active trading involves more risk than investments.
So, you will need to determine what your net worth is and what percent of
that is realistic to put at risk in an active trading environment. My rule of
thumb is generally not to risk more than 10 percent of one’s net worth, but
of course, if you are Bill Gates or Warren Buffett, you can safely risk much
more than 10 percent. So here you will determine what the right amount is
for you. As your net worth grows, you can reevaluate the amount you have
in your trading account. 10 percent of total net worth is the maximum amount risked in my
active trading account.
Other:WHEN WILL YOU EXIT A TRADE?Identifying exits really falls under the trading system category in that your
exits should be placed at meaningful places in the market that are deter-
mined by support and resistance. With that said, it is important to always
determine your initial exitpriorto entering the trade. And then you need
to exit your trade when your stop tells you to.