No articles found to show on this page.
The logic lies in basic maths and the fact that markets are inherently uncertain. To elaborate a little with an example:
If I only risk 1% of my account on a trade and take a 1:1 return:risk on each trade I’d need a net 50 winning trades to achieve 50% return in a month, somewhat unlikely. If I took a 5:1 R:R on each trade I’d only need a net 10 trades but what is the chance of 10 net 5:1 trades in a month? Again, pretty unlikely.
Now let’s risk 25% of my account on each trade. At 1:1 R:R I only need 2 net winning trades to make my 50% in the month. This is very achievable. I don’t need to go anywhere near a 5:1 R:R, just 1 net winning trades at 2:1 R:R gets me there.
Sadly, there is a catch. The rub is that risk cuts both ways. If I have just 2 net losing trades at 1:1 when risking 25% per trade, my account has halved. My chances of recovery from there are slim, I now need to double the account just to get back to where I started. And imagine how I’m feeling when fully half my cash has disappeared in short order. If I risk only 1% per trade, the same scenario is down just 2%, a very much less stressful position and an easy recovery.
Obviously, if I had the gift of perfect prediction I’d be putting on 100% of my account per trade. Unfortunately, trading is an inherently risky and uncertain business, anything can happen and everyone gets losing sequences of trades. It is inevitable and part of the reality of trading. You must be able to survive these and risking too much per trade is a certain way of ensuring you will not make it.
Hope that helps.