Page 50 - Trading #101 Course – PART II TWO: SUCCESSFUL TRADING PIE – www.traderscoach.com

TRADING #101 COURSE – PART II TWO: SUCCESSFUL TRADING PIE – WWW.TRADERSCOACH.COM

The 2 Percent Risk Formula

Hypothetically let’s say that your optimal f formula and/or your risk of ruin tables tell you
that the optimum percent for you to risk on each trade should be 2 percent. Here is how
you will calculate that formula.

2 Percent Risk Formula:

Account Size X 2% = Risk Amount

Example of the 2 Percent Risk Formula::
$25,000 X 2% = $500

This means that if you have a $25,000 trading account and you are going to calculate a
2 percent risk amount on that account, you will be able to risk $500 per trade and not
subject yourself to risk of ruin. This means that if a trade goes against you and you are
stopped out, the most you will lose is $500, including commission.

The Trade Size Formula

After you know what dollar amount you can afford to put at risk, the next step is to
calculate your trade size to fit within this framework. It is a bit like reverse engineering
the trade by taking on only as large a trade as your risk parameters allow you to.

It is imperative that you do not decide on your trade size randomly. When students tell
me that they always trade in lots of 1,000 shares, I know they are not calculating the
exact optimal trade size. If they were doing the calculations, the trade size would vary
depending on the market dynamics. In addition to this, you must know your entry and
your exit before you get into a live trade. For example:

Trade Size Formula:
Risk Amount – Commission ÷ Difference between Entry and Exit = Trade Size

Example #1 of the Trade Size Formula:

$500 – $80 ÷ $1.50 = 280 shares

Details:

• Trading account size: $25,000.
• Percent of capital at risk: 2%
• 2 percent risk amount: $500.
• MSFT trade entry value: $60 per share.
• MSFT initial stop: $58.50 per share.
• Difference between entry and stop: $1.50.

50 | P a g e