The idea that you should only risk 1-2% of your trading account is a bit of advice which is thrown around alot in trading circles. It’s become trading dogma. I am not a big fan of hard and fast rules and this one falls into that category. While those percentages might work for the majority of traders – and certainly some very prominent figures in the markets have cited them – they are not necessarily appropriate at all times or for all systems.
The question was recently asked “When you can reasonably estimate the average % of trades as drawdown, the average % in profit ( per week/month) do seasoned traders increase their % risk from the recommended 1-2% of capital?”. The short answer is “Yes”.
It all comes down to testing. Backtest with different risk percentages and see what happens when you use larger risk ones. You may indeed find that 1-2% is the right area to be in, and you may not. Your position sizing should be a function of your system and your risk tolerance, not some rule you heard from another trader or read in a book.
Also note that there is the question of increasing the size of trades which are moving in your favor. That too is part of risk management and should be another element of the testing process if your trading strategy is one which is suitable for adding to open trades (trend trading, for example).
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About the Author
John Forman, author of this blog, has traded for more than 20 years, is a professional market analyst, and authored The Essentials of Trading. He is an active participant in trading forums, consults for trading related businesses, as published literally dozens of trading articles, and has been quoted in a number of books and in the media.
** See John’s full bio.
