How Much Risk Should I Take?

I always struggled with this question when I first started trading. On the one hand, you want to make huge returns! On the other, you may recognize that losing your money is a very real possibility and at times will happen. Too much risk and you can seriously damage your account and with too little, you’ll never see the kind of returns you need to build real wealth. But this question goes much deeper in that you must ask yourself what kind of trader you want to be. Are you going to day trade? Swing trade? Long term trading? Personally, I like a balanced approach. I do a little of all these things although I rarely day trade. Sometimes you may buy an option or stock and the same day it really fly’s and makes you a lot of money! In this case, it may make sense to take your profit and run. Just keep in mind the day trading minimum requirements and such.

If you’re a new trader and have very little appetite for loss. You should limit your risk to a very small percentage of your account. Don’t put out a significant portion of your cash into any particular trade. Although, if you have a very small account this may be hard to avoid. If you’re trading stock, there is nothing wrong with only buying a couple of share, it’s better to dip your toes in the water than drown. And if you’re trading options only purchase one contract. There is nothing wrong with trading very small, especially nowadays with virtually no trade fees. How great is it to live in these times of free trading!?

Another important concept to keep in mind is that of FOMO or fear of missing out. Another one I fight everyday myself. Keep this in mind, there will always be opportunities in the market! Literally every single day. It’s easy to miss out on a trade you were watching only to see it sky rocket as you lose out on all that potential profit. It’s even easier to give into the FOMO and make an irrational decision after the opportunity is gone. Timing is everything and when you miss out, it’s better to just walk away and look for something else. Most of the time you’ll be glad you did. Trust me!

Now, for those of you willing to take more risk or the outright gamblers among us. You still need to calculate your decisions. Buying without a strategy for your entry and exit is generally not a good idea. So, here is a concept I personally go by. I try to put roughly the same amount of money into each trade and let me explain why. In our stock picking service we estimate our picks to be roughly 70-90% accurate at any given time, give or take. Let’s say we pick 5 stocks. There is likely going to be 1 or 2 losers in those picks. If you trade options on only one, it’s possible you are picking the loser. Furthermore, let’s say you trade options on all 5, but you decide you like one more than the others. So you put all your eggs into that one you really like, perhaps you purchase 10 contracts on that one, but the other 4 you only purchase 2. You probably already see where I am going with this. Perhaps you picked the loser! Those 10 contracts are going to give you a massive loss while the 3 or 4 winners simply won’t be enough to outweigh the loser. And this is why I try to balance out my trades. Sometimes I do go a little heavier on one, but usually I have a calculated reason for doing so.

The Risk I took was calculated, but man am I bad at math

In closing, if you aren’t a subscriber to our premium service yet, check us out! There is no long term obligation and you can pay month to month. Cancel anytime. Remember trading is risky and only you can decide what trades are right for you. While we can make no guarantees, we do our best to help make things a little easier by applying our proven system to our stock picks, but ultimately only you can decide when to buy and sell. The market is a zoo, don’t go it alone!

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