Risk the Same Amount of Money Per Trade
Traders often refer to the amount of money risked in a trade as “R”. A trade where you lose this risked money is called a -1R trade. That is, you lose 1R when the trade hits your stop. A trade where you make twice as much as you risk would be a 2R trade. When I began day trading, I found myself starting my days rather responsibly, risking perhaps $50 per trade. However, when my first trade would stop out, I would inevitably risk more to try to make up the loss more easily and get back to “green” on the day. When that trade didn’t work out, I might be down $150 and I would risk even
more. It was the classic gambler error of making bigger bets to get out of a hole. To make matters worse, I often became impatient with these larger bets. In my mind I would think, “I just need to get this trade to work out, I’ll get back to profitability, and then I will reduce risk again.
” It was really a recipe for psychological disaster. Eventually, I took the advice of a Bear Bull Traders moderator and began to think in terms of “R” and risk the same amount of money per trade. By doing so, I could better conceptualize what a -1R loss meant for my trading day and could become accustomed to losing it. For example, a losing trade is always
a $50 loss. Two bad trades to start the day are a $100 loss and I need a good setup 2R trade to get back to break-even. I began to think in terms of these “R” steps and it had an immense impact on my trading maturity and patience.