No matter how big your portfolio is, youâll need to exercise proper risk management. Otherwise, you may quickly blow up your account and suffer considerable losses. Weeks or even months of progress can be wiped out by a single poorly managed trade.
A fundamental goal when it comes to trading or investing is to avoid making emotional decisions. As financial risk is involved, emotions will play a huge part. Youâll need to be able to keep them in check so that they donât affect your trading and investment decisions. This is why itâs useful to come up with sets of rules that you can follow during your investment and trading activities.
Letâs call these rules your trading system. The purpose of this system is to manage risk, but equally importantly, to help eliminate unnecessary decisions. This way, when the time comes, your trading system wonât allow you to make hasty and impulsive decisions.
When youâre establishing these systems, youâll need to consider a few things. Whatâs your investment horizon? Whatâs your risk tolerance? How much capital can you risk? We could think of many others, but in this article, weâll focus on one specific aspect â how to size your positions for individual trades.
To do that, first, weâll need to determine how big your trading account is, and how much of it youâre willing to risk on a single trade.