Where there is a mirage there is an oasis. Similarly, where there is trading there is a risk. One of the most distinguishing features of trading is the risks associated. Hence, it is important to learn some rules to manage risk, which in turn will help you manage your money. Your risk management and money management capabilities are the deciding factors that will determine the success of the trades you place every day. Find out more here.
One of the most important rules in managing risks while trading is the “Rule of 1% Risk”. If you are thinking, whether the rule is encouraging you to risk at least 1% of your investment, then you are wrong. The idea here is to protect yourself from losing not a penny more than what you can actually lose.
The strategy of the Rule: The rule effectively strategizes in such a way that it forbids you from trading, that is investing not more than 1% of the total amount in your account on one single trade. For example, if you have $25,000 in your trade account, then you are forced to trade only 1% of it, that is less than $250 on one single trade and not a cent more than that.
The advantage of the Rule: Irrespective of the number of incorrect trades you execute you are provided with an opportunity to make up for the loss at a later date by saving up more in the bank than losing that amount in a bad trade. Hence, the rule is best to protect your earnings during a turbulent market yet allowing you to expect greater returns.
Plus Side of the Rule: When you risking 1% of your investments, then you are wagering on a profit estimate of at least 1.5% to 2% of the total value. Hence, a profit in this range will allow you to make quick money with a few successful trades wherein your trade losses will be minimized.
Who should adopt the Rule? Although this rule is effective for almost all kinds of users, it is highly recommended for new amateur traders who are just learning the know-how of the trade. During the initial trade days, losses are bound to happen and they happen so fast that you get blinded soon. Therefore, strategizing and following rules to protect your income is ideal.
What are the other Rules? The safest rule is to minimize your losses and the 1% risk theory is a great start. However, there are certain variations to this. That is once you have mastered the trade skills using the 1% rule, you can increase the risk limit to maybe 1.5%, 2%, or even a bit higher.
Overall, the goal is to minimize losses and maximize profits. Therefore, follow rules to trade on the safer side of the market.