How much money should I put in each trade?
Most people think that you should position size based on how much money you have. Makes sense, right? If you have more money, use bigger position sizes.
But the most successful traders in the world actually determine their position sizes based on risk.
In other words, trades where risk is high get smaller positions and trades where risks are low get larger positions. That’s a logical move for a couple of reasons — first, it cuts the odds that a risky trade can cause serious damage to your account if it goes against you and gets stopped out. After all, we expect to get stopped out on some trades. And second, risk is typically tied to reward, so you compensate for smaller potential upside in low-risk trades by taking bigger positions in them.
While we can’t tell you exactly how you should size positions for your specific situation, a good general rule is to never risk more than 2% of your portfolio on any trade. If you’re buying a stock that means the total dollar loss if your stop gets triggered is never more than the 2% of your account value.
There’s a little bit more to position sizing options, but the same general 2% rule applies.
If you want more information about position sizing, check out Video No. 3 of our training series here.
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