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Meaningful Risk?

You can read in many places that you should only risk 1% of your equity per trade.

It’s so prevalent that it’s almost taken as gospel.  I think that’s a good thing as it promotes protecting your account and if you have a system with a decent risk return your winners ought to cover your losses leaving you nicely up – keeping it all gravy for you.

Now take a look at this chart showing a poll from the Wall Street Journal:

Cautious poll Meaningful Risk?

Link to chart here

Now granted, this is about a mistake that mutual fund investors feel they have made most often, but it shows that at least 40% of respondents regret having been too cautious.

While the general advice of risking no more than 1% a trade is sound advice, you have to:

“Risk no more than you can afford to lose and also risk enough so that a win is meaningful”

It’s important to consider not just what you are willing to lose but also what you want to win and how you are going to trade to make that a reality.

There are two sides to this equation that are worth thinking about. Have you considered both? Having too little risk might mean not achieving your financial goals.

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