Most new traders make grave errors in judgment when opening positions that place tremendous risk to their account equity. Sometimes it is greed, sometimes it is fear — but in either case it always results in losing money. To avoid unnecessary risk, always follow a proper money management plan.
The general rule of thumb is never place more than 5% of the account equity at risk in a single position — this is the ultimate goal. However, this can be extremely difficult to do with only a few thousand dollars, or less, in your brokerage account. You will have to adjust this percentage to a more manageable number such as 10% or 20% until your capital increases.
For example, let’s say you have $2500 in your brokerage account. You have decided to allocate no more than 10% in a single position. You would then not risk more than $250 in any single position. By practicing proper money management, you could lose 3 trades in a row and still have 70% of your account equity left.
Remember, the goal is to risk only 5% or your account equity in any single position as soon as possible. Once you have decided to use 5% for each position — never revert back to a higher percentage (10% or 20%) regardless how good the trade looks.
Money management is here to protect your money. Not following proper money management will certainly wipe out your account. Following proper money management will always allow you to trade another day.
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