Taking More Risk on One Trade

One of the many issues I often come across with my trading clients is the mistake of placing different weights of risk on each trade/position they hold.

To me this defies logic.

You see, if you accept that no one singular trade is any more of a sure bet than the other, why would you take more risk on one, and less risk on the other?

I have had a number of personal coaching clients now who after several months of trading were seeing dull and uninspiring results with their trading, only to find out that if they had placed equal risk on every trade they made, those uninspiring results would have been great results. Their big winning trades had been entered with less risk and lower position sizes, and their losers had higher risk and large position sizes, dramatically sabotaging their own results.

The trades themselves were fine. But their position sizing let them down. It’s easy to then work out that had the trader taken the same equal amount of risk on each trade, they would have made more money. And in every case of this I’ve personally seen this has always been the case. I have seen a couple of instances where spreading risk equally would have kept their results about the same, but whats interesting is i’ve seen an abundance of cases where their results would have been much better and I’m yet to ever experience a situation where the results would have been worse using a flat rate of equal risk.

One bad trade with too much risk can cause a lot of damage to your account. It can ruin months of successful trading.

In my experience this is a prime example of traders who have not yet been able to leave the concept of prediction behind. They are still weighing their trades as “this one looks like it might be a good one”, and “this one looks like it might not work out”. As a result they are putting more risk on one, and less on the other.

The “zen” moment as a trader for me was when I accepted I have zero power to read the future with any degree of accuracy or consistency. Its when you realise that building a system that profits regardless of what the markets do, rather than a system that relies on predicting them, is the best chance you and I have of making profits consistently over time.

So the takeaway here is this…..

Don’t weigh you risk per trade differently on different opportunities. Find your true personal risk tolerance and apply it to every trade you make. This is not the same as buying the same amount of shares on every trade, or having the same position size on each trade. (A common mistake I see traders making). This is about knowing what your maximum exposure is on the trade and keeping that the same on every trade you make.

You do not know which ones are going to fizzle out and which ones are going to fly. Most of us do not have that power if we are honest with ourselves (most traders aren’t). Risk Management one of the main keys to success in this business. If you are putting more weight on certain trades you are going back to the world of trying to make predictions.

Keep it at 1% risk on every trade. And if you do not know how to work that out, get some training on it fast. As not knowing how to do this properly can spell certain disaster for your trading account in the future.

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About Chris Chillingworth

Self confessed lover of racing, american football and whiskey. Trader and Investor since 2011. Chris has now coached over +1500 traders using his mechanical systematic trading strategies and now also runs a members only watchlist of FTSE stocks.

View all posts by Chris Chillingworth

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