There is a saying in the trading industry: the primary criterion for evaluating whether a trader is professional is not his profit level, but his risk control ability.
For professional investors, they don't care too much about the temporary ups and downs of a certain asset, but focus on portfolio management. The most important thing in portfolio management is not all to increase the net worth, but also to avoid adverse events. Try not to let your net worth drop.
Risk control has always been regarded as one of the compulsory courses for professional traders, and many famous traders have always regarded risk control as an important indicator in trading decision-making. And one of the risk management rules called "1% risk criterion" is sought after by many traders.
By following this guideline, when a trader is away for the day or experiences tough market conditions, capital losses are kept to a minimum while still having the potential for great monthly returns.
A senior overseas trader is a firm implementer and beneficiary of the 1% risk rule. He joined Wall Street at the age of 26, and achieved enviable performance in the first three years as a trader, with a profit of more than 2 million US dollars .
At the beginning of the transaction, a trader was also very confused. He once lost hundreds of thousands of dollars in just six months of trading. This made him very troubled and confused, and then he calmed down and sorted out his transactions for half a year.
In the end, he found that the important reason for the loss was not because of his improper strategy, but because he ignored the necessity of risk control.
In an interview with reporters recently, he revealed his secrets of making profits. In addition to his solid trading experience, he especially emphasized his control of risks, that is, he always implements the 1% risk rule.
Now, let us look at the charm of this principle.
1% risk criterion
Following this guideline means you will never risk more than 1% of your account value on a single trade. Of course, this does not mean that only 1% of the trading account amount is used for each transaction. You can use all of your money in a single trade, even with leverage.
The 1% risk rule means that appropriate risk management measures are taken to prevent losses of more than 1 percent on any one trade.
No one can make a profit on every transaction, and the 1% risk rule can help traders not lose a lot of money in unexpected situations
Just imagine, if your risk per trade is 1% of your current account balance, you need to lose money in 100 consecutive trades to clear your account.
According to the trader, if novice traders follow the 1% risk guideline, many of them can start to make real profits after a year of trading. Of course, when taking 1% risk, you should also set a profit target of 1% - 2% for each trade.
After a few days of trading, even if you have a 50% success rate on your trades, you can earn a few pips in return.
Assuming that you have $30,000 in your account, based on the 1% risk rule, the loss you can afford in a single transaction is $300. In this way, you can know exactly where your stop loss is. For example, if you buy a EUR/USD currency pair with a position value of $3,000 at 1.0000 and set the leverage to 10 times, then your stop loss point should be set at 0.9900.
This approach allows you to adjust to various market conditions and still make money whether the market is stable or not. This method also applies to all markets.
Scale adjustment
Traders with trading accounts below $100,000 typically use the 1% rule. After continuing to make profits, some traders will expand this risk ratio, such as increasing it to 2%.
For accounts above $100,000, senior traders recommend further reducing the risk ratio, such as to 0.5% or even 0.1%. Because the value of the position is too large, the risk of the transaction has been increased in essence.
For short-term trading, the 1% risk increase position makes the exposure of the entire position too large. Every trader can find a percentage that they are comfortable with that matches the liquidity of the market they are trading.
But no matter what percentage you choose, keep it under 2%, and I emphasize this very much.
Long-term profit, the last laugh
Following the 1% risk rule may not pay off very well for some time. But from a longer-term perspective, you will find that your account funds appreciate faster than others.
Because you have accumulated more trading experience and practiced your own strategy within a smaller loss ratio.
After those novice traders quickly lose their capital, you may find yourself the last laugher.
I hope this article was useful to you, at least in terms of the basic principles of trading, and I hope you can find yourself in the right direction.
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