When it comes to risk management, there are a number of different aspects that make it up, one of those things is the size of our trade. This may seem obvious to some, but you would probably be surprised to see just how many people do not fully understand the importance of having the right trade size. Mistakes can be made by going too small, but those mistakes won’t cost you your account, the ones that will are those that place trades that are far too big for either their account or the strategy that they are using, this can have a detrimental and potentially dangerous effect on an account.
It should be noted that having a consistent trade size does not actually mean that it needs to be the same for every single trade, there are scenarios where you need to adjust your trade size, especially if that is part of your strategy. What is important is that you understand where your strategy is and what the size that is required for your strategy to be successful and consistent.
So let’s take a very basic look at how the trade sizes can affect your strategy and account. If your strategy has you risking 2% of your account for each trade, this percentage will be a combination of both the trade size and the stop loss location. If the stop loss location remains the same, but you increase the trade size, you will then be increasing the risk for that trade and ti will be more than 2%, as your strategy has a fixed stop loss, then increasing your trade size can be seen as a way to increase your profits, but if your account does not have the balance for it, this is not an appropriate way of increasing your profits.
Many people coming into trading wish to make a lot of money, quit their job, or to just become rich, they do this by placing trades that are far too large for their accounts. Every single time a trade is put on that is too high, the account is at risk, you are on track to lose a lot of money and multiple of these larger trades in a row can result in an entire account being blown, not something that any trader wants.
Similarly, simply not knowing what our trade size should be can cause two different scenarios that are detrimental to your overall trading and profitability. If you do not know that your trades are too high then you will be risking too much of your account which could then lead to a blown account or a lot of losses. If you are opening too small then there is a chance that it will demotivate you. You are not making as much money as you anticipated and were expecting, both are detrimental to your trading, which is why it is important to fully understand exactly what your trade sizes should be.
So how do we ensure that we have the right trade size for our strategy? Well it’s simple, when we set up our strategy, we should have set our risk management and this will include exactly how big a trade should be for any situation that may arise. You should be looking at your strategy and your risk ratio and this will help you to decide exactly what your trade sizes are.
If you feel that there is something wrong with the trade sizes that you are using, you first need to acknowledge that there is something wrong, you then need to be able to work out why it is going wrong. For many it could simply be an emotional thing, others being overconfident or greedy can result in you increasing your trade sizes, this is then putting your account at risk. If You feel like you have too much confidence, or just simply want more, you need to think back to your strategy and to stick with it, it is there for a reason and it is there to keep your account safe, do not overtrade just because you think you can or that you simply just want more, it will only lead to bad trades and losses.
It is important that you know your personal limits, as well as the limits of your strategy, do not try to push them, they are called limits for a reason, they are there for a reason, do not try to push past them., If you are feeling yourself getting the urges to push too much, then take a step back. Your strategies rules are there for a reason, keep to them, it is that simple, the more you try to push them, the more risk that you are putting on that strategy which could potentially push them past those limits which will only lead to disaster.
You need to keep your trade sizes small enough so that when you win or lose, they do not push your emotions too far either way. Your strategy has losses built into it, so accept them and move on, do not let them evoke strong emotions that could potentially jeopardize your overall trading and profitability.
So those are some of the reasons why it is so important to know your trade sizes and to be able to risk only what you need to risk, doing anything differently will only lead to disaster or disappointment.