The two most important aspects of managing risk:
- How much you can afford to risk based on probable outcomes
- How to size your position
How Much Capital can you Afford to Risk Based on Probable Outcomes
In order to determine how much capital you can afford to risk, you need to find out:
- What percentage of the time you have a successful trade/unsuccessful trade.
- The size of the average Win/Loss.
- Amount of Capital you are trading.
- How much ‘Capital at Risk’ you have available on any given day.
- The following page will help you discover these components of the Risk Management Formula
Once you know the variables that determine how much you can afford to risk, then you can begin to decide how to size your position. In order to determine the size of your position you need to know:
- Max Loss
- Size of your Stop-Loss
- This page will help you in determining your Position Sizing