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 going to 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 swings 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 $2,000 account, right? You have $2,000 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 2% rule. So when you follow the 2% rule, you have to make sure that you're only willing to lose or putting up risk of 2% of your account size. What that means is if your account is at 2000 and you're risking 2%, you should only lose a maximum of $40 per trade.

Right? So, for example, once again, you have a $2,000 account, you're risking 2%. If you're risking 2%, the most you should lose on a single trade is $40. Now, I don't think you should increase this, especially starting out. I think even starting out, you, you could reduce this to maybe 1%, right? I don't think you should go higher than 2%. 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 wanna understand, especially when you're starting out, you wanna limit your downside like I said before, and by doing so, you wanna have a maximum loss per trade. Okay? Now this is how you use the formula of the 2%, right? So let's say, let's keep all these facts up here and understand. So once again, you have a $2,000 account, right? Gonna put it up right there. Max.

Loss is 2%, which is $40 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 $10 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. A stop loss at $9, $8, 920. 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 $9 is a key area for this stock. Key area, meaning every time the stock went to nine, it bounced up. Now, obviously, this is 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 $9 mark. Now at the $9 mark, we see there's a lot of support. So we are going to put our stop loss hypothetically at, let's say.

$8.90. Okay. Or actually, just for math purposes, I'll make another video on how to 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 where to place stops. And placing stops is a. That itself is a whole new topic in trading that 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 $9. Right? And the reason we select the 9 is because 9 makes a lot of sense. Right? Based off price action. Now, we are risking $1 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 lose on this trade is $40 based on my account size. So on this trade, I'm losing $1 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 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 trade 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, right? And that was my max loss per trade. Now, if I have 100 shares, right? And it goes to my stop loss area of $9. I'm now losing $100, which is way over my 2% rule, right? Let's work with a different example, just so we can understand a little bit better, right? Let's say a stock is trading at 10, okay? And the stock. And we have a stop loss at 950, meaning we're losing 50 cents per trade. If we are wrong. Now, in this situation, same thing, $0.50 divided by $40, we now get 80. Now we can buy 80, 80 shares. And if we are wrong, we lose $40. Now, this is what you gotta keep in mind. Don't place your stop loss in the area based on risk management because of how many shares you wanna buy. Don't look at this chart and say, you know what? I'm gonna put my stop loss in 950 because I wanna 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 place 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 2% rule, 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 2% rule is. So if your account is at $1,000, that puts you at a 2% loss of $20. If your account's at $2,000, that puts you at $40. 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 3 to 1 or a 2 to 1 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 going to happen is you're going to end up having major drawdowns 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 so keep this in mind moving forward. 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 DM me. I'll be answering any trading related questions at all there once. 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.