Position size in trading; How much capital should we invest in each transaction? (part 2)
Determining trading stock risk:
If you had $100 in stock, how much loss do you make in each transaction? In other words, how much of that $100 should you enter into each trade?
The second step is to determine the risk of the account. This step involves deciding what percentage of trading capital you want to risk in a single trade.
The 1% rule states that you should not risk more than 1% of your account in a transaction. Of course, this does not mean that you have to trade with only 1% of your account; Rather, it means that if your trading idea was wrong and your loss limit was violated, you should lose only 1% of your account.
In other words, your loss according to this law should be equal to 1% of your trading account, not the total amount you have entered into the transaction.
In addition to the size of the trading account and the risk of the account, determining the loss limit depends on the price of the cryptocurrency.
You should find out from your calculations and analysis that if the market moves a few percent against your forecast, your loss will be more than 1% of your account.
In other words, determining this point is based on your personal trading strategies and the specific settings you use.
By doubling the trading risk, the size of the position was reduced by half.
So if we want to increase the risk of our transaction, we must at least reduce the size of the position so as not to face a significant loss and protect our capital.
Remember that the best way to learn risk management is to practice.Everything we covered in this article was on a theoretical level. It is up to you to turn this information into a practical skill.