4 min read
Let's start with a small example. Imagine two traders. The trader A it can boast a 50% payout rate, an average profit of $ 200 and an average loss of $ 100. The trader B has a 75% payout rate, but also has an average profit of $ 100 and an average loss of $ 400. It is easy to see that in the long run the trader A, although with less success as regards the winning rate, will win, while the trader B will waste his money.
What does this mean to you? In trading, it is usually more important not to lose what you have than to earn more. Countless traders, investors and industry experts have dedicated their time to the risk management problem and, in the end, have come up with what may seem to be a commonly accepted solution. Apparently, the first thing to consider is the amount of money you can afford to lose in a single operation.
But what is this amount exactly? Should you risk $ 10, $ 100 or $ 1,000? No! Most professional traders believe that the amount of money spent on a single transaction should not be fixed, but rather one percentage of your entire trading budget.
Opinions differ on the percentage you may wish to choose. According to some, it should not exceed 3%. But according to the most conservative approach, it should be only 1%. The 1% rule can also be interpreted in other ways – some say you should not allocate more than 1% of the entire account to a single transaction (since you may lose your entire investment), others believe that as long as you can to correctly manage the risks, you can assign any amount of money, but closing the transaction as soon as you have lost 1% of the entire account. If the second approach is the one for you, then you can assign a higher percentage (up to 100%), but leave the transaction in advance as soon as your losses reach 1%. This is where the Stop-Loss feature comes into play.
Nobody is able to win 100% of the transactions. It is therefore essential for a trader to make sure that he does not lose what he can not afford to lose. When you use "1% rule", You should lose 100 transactions in a row to clear your account, which leaves enough room for errors.
But is it possible to make money with trading when you allocate only 1% of your trading capital in a single operation? According to most professional traders, the answer is yes. Risking less and winning less make your trading strategy more consistent and then you can move from substantial but mainly random wins / losses to less impressive but more stable wins / losses.
This article does not represent an investment advice. Any reference to past movements or price levels is informative and based on external analyzes, we do not provide any guarantee that such movements or levels may reoccur in the future. In accordance with the requirements set by the European Securities and Markets Authority (ESMA), trading with binary and digital options is only available to customers categorized as professional clients.
GENERAL INFORMATION ON RISKS:
CFDs are complex instruments and carry the high risk of losing money quickly due to the leverage effect. 76% of retail investor accounts lose money when trading with CFD through this provider. You should make sure you understand how CFDs work and if you can afford to take the high risk of losing your money.
Source: IQOption blog 2018-11-28 12:45:18