2% Risk Management Rule For Trading...

so it's not about how much money you make as a trader but it's about how much money you actually keep now in order to keep a lot of money you need to learn how to protect your capital so this is where risk management kicks in so risk management in my opinion is one of the key pillars of successful trading you have to have everything down packed with risk management you need to have the proper strategies proper formulas that you're going to implement to know how much money you should be losing per trade and what is

your maximum drawdown now most traders that don't have the risk management strategy down packed and don't follow it typically tend to blow their accounts very quickly in a short period of time now in this video i'm gonna break down a risk management strategy that everyone should implement as traders if they really really want to protect their capital and stay alive in this game for the long run now when most traders are starting out they don't know how much money they should risk per trade based on their account size what typically happens is someone opens up

a brokerage account funds their account and just takes massive trades massive strings and massive positions which in return takes only one or two bad trades which wipes them out now you as a trader what you want to keep in mind is you want to keep your capital protected at all times now you have to understand certain fundamental truths about trading the first truth which is the most important one is that you are going to lose money there's no way around it like it's impossible for you not to lose money it's going to happen but the

idea is for you to limit how much you lose right so that's what has to be applied in each and every single trading component how much money are you going to lose meaning limiting your downside and that's where risk management kicks in so i'm going to give you guys a few examples that everyone i think should implement so first example let's say you're starting out with a two thousand dollar account right you have two thousand dollars invested into an account now based on this what a lot of people do is they take this 2000 and

dump it in one trade right they go in one trade and they put all the money in that one trade now this in my opinion is not the right way to go about it because you are risking your full capital and you don't know any logistics of what's going on what you want to do is based on your account size you want to know how much should i risk for each trade now a typical rule is the two percent rule so when you follow the two percent rule you have to make sure that you're only

willing to lose or putting up risk of two percent of your account size what that means is if your account is at two thousand and you're risking two percent you should only lose a maximum of forty dollars per trade right so for example once again you have a two thousand dollar account you're risking two percent if you're risking two percent the most you should lose on a single trade is forty dollars now i don't think you should increase this especially starting out i think even starting out you can reduce this to maybe one percent right

i don't think you should go higher than two percent and that's like the rule of thumb that a lot of traders really really follow and i understand looking at this it's not exciting right but you want to understand especially when you're starting out you want to limit your downside like i said before and by doing so you want to have a maximum loss per trade okay now this is how you use the formula of the two percent right so let's say let's keep all these facts up here and understand so once again you have a

two thousand dollar account right i'm gonna put it up right there max loss is two percent which is forty dollars per trade okay so let's say we're looking at a stock that is trading at 10 this is where position sizing kicks in now we know how much we should lose on a trade on a maximum amount but now the second aspect is okay how much shares do we buy now that's going to be adjusted based on each and every single trade you guys take every trade is going to be different so let's look at trade

a let's say a stock is trading at 10 now obviously before you guys take any position i highly recommend that you know the first main thing that should be outlined right off the bat and that is knowing where you will exit knowing where you are going to be wrong knowing where you are going to cut your losses like that has to be established right off the bat if you get into a trade and you don't have that established don't take the trade like that's the worst thing to do don't set that area after you get

into the trade no set that in the trade before you execute the trade okay so ten dollars is where the stock is currently trading at okay now before you take this trade you have to say okay what area should i set a stop loss at what area should i exit at and this area has to make sense based off price action like you can't just look at a random stock chart and say i'm gonna put a stop uh a stop loss at nine dollars eight dollars nine twenty no that area has to make sense based

on real price action what is the chart telling me so in this situation let's say let's just say nine dollars is a key area for this stock key area meaning every time the stock went to nine it bounced up now obviously this is very a lot of elementary stuff and i'm trying to focus on it from a basic aspect but let's say we're looking at the nine dollar mark now the nine dollar mark we see there's a lot of support so we are going to put our stop loss hypothetically at let's say eight dollars and

90 cents okay or actually just for math purposes i'll make another video on how to you know properly place your stops but let's just say we put our stop loss at nine right and i'll go over a whole new video on way to play stops and placing stops is a that itself is a whole new topic and training that you you must master knowing when to take a loss knowing when to exit right but let's just say in this area we are going to exit if this stock gets to nine dollars right and the reason

we select the nine is because nine makes a lot of sense right based off price action now we are risking one dollar in this trade so now the formula or the math that we have to do behind this is to understand that the maximum amount of money i can use on this trade is 40 based on my account size so on this trade i'm losing one dollar per share so all i typically do is i divide the share price meaning how much i'm losing per trade by my total trade amount so for example it would

be me dividing the dollar by my 40 per share which allows me to buy 40 shares of this stock why because if i buy 40 shares at 10 now in this situation what i can basically do is if i have 40 shares right here and this trade goes against me which it can obviously and like i said before every time we take a trade we want to make sure we implement the basics so if this trade goes against me right i lose a dollar per trade but because i have 40 shares i am only losing

40 dollars right and that was my max loss per trade now if i have a hundred shares right and it goes to my stop-loss area of nine dollars i'm now losing a hundred dollars which is way over my two percent rule right let's work with a different example just so we can understand a little bit better right let's say stock is trading at 10 okay and the stock and we have a stop loss at 9.50 meaning we're losing 50 cents per trade if we are wrong now in this situation same thing 50 cents divided by

40 we now get 80. now we can buy 80 shares and if we are wrong we lose 40 now this is what you got to keep in mind don't place your stop loss in the area based on risk management because of how many shares you want to buy don't look at this chart and say you know what i'm going to put my stop loss in 950 because i want to buy more shares okay no place your stop-loss on an area where if the stock goes there you will be wrong and once again i have a

video on where to place your stops which i'll break down but you really need to know how to play stops the right way because this will save you a lot of money and a lot of bad mistakes right so that's the first whole component of risk management so let's recap that real quick have a two percent role right based on your account size what is the max amount i'm going to lose on my account okay second thing i want you to do every time you take on a position understand how many shares can i buy

based on where i'm gonna exit so if i am wrong i am around this area so what i want you guys to do is comment down below what your two percent rule is so if your account is at a thousand dollars that puts you at a two percent loss of twenty dollars if your account is at two thousand dollars that puts you at forty dollars i want you to comment that right now so everyone is on the same page and understands what their max loss should be now i understand when you look at this it

sounds very boring because it's like okay omar i'm risking 40 on a trade right and if i'm risking 40 on a trade what am i possibly making i'm risking 40 i'm possibly making 80 maybe 120 right because it's a three to one or a two to one ratio right but you have to understand the longevity of this game the longevity of this game is you always want to protect your downside guys if you're not protecting your downside what's gonna happen is you're gonna end up having major drawdown meaning your account equity will go like that

in one trade and if you take a major hit on one trade that is like the worst thing you can do for yourself as a trader so keep this in mind moving forward the holy one of the holy grail things of trading besides looking at indicators or price action or understanding any of that is to protect and preserve your capital need to learn how to do that and implement it if you really are serious about trading for the long run and making this an actual career if you guys have any questions please follow my instagram

i'm gonna post my instagram right here uh dm me i'll be answering any trading related questions at all there once again if you like the video please give it a thumbs up and subscribe to this channel and i'll see you next time thank you