No matter how big your portfolio is, you’ll 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. You’ll need to be able to keep them in check so that they don’t affect your trading and investment decisions. This is why it’s useful to come up with sets of rules that you can follow during your investment and trading activities.
Let’s 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 won’t allow you to make hasty and impulsive decisions.
When you’re establishing these systems, you’ll need to consider a few things. What’s your investment horizon? What’s your risk tolerance? How much capital can you risk? We could think of many others, but in this article, we’ll focus on one specific aspect – how to size your positions for individual trades.
To do that, first, we’ll need to determine how big your trading account is, and how much of it you’re willing to risk on a single trade.