There have been many books and articles written on the subject of risk management. Some of the books are good and practical, and others are highly theoretical. One tried-and-true principle is the consistent application of the 2% rule. The 2% rule says that you should keep individual trade losses under 2% of your account balance. Therefore, a $25,000 account should keep risk-per-trade to under $500. I realize this is very difficult to do, utilizing full size futures contracts, without placing the stop too close; so what’s the answer?

IT’S STRATREGY. In our pivot trades, or even trend entry, the general rule is that you should have a profit on the close; if not, get out. This rule will keep smaller accounts in the game for the big move. Check out the math: A $25,000 account that experiences 8 losses in a row utilizing the 2% rule will keep drawdowns from exceeding 20%. However, if the same account employs no discipline in risk-per-trade, and ends up risking 5% per trade in aggregates, then the same string of losses will results in a 40% drawdown. I believe most of us can stomach a 20% decline in equity and keep trading; however, 40% is an entirely different story.


Remember, we want to use the proper stop, relative to the method of the trade. We reduce risk by reducing the size of the position, and by strategizing. If you have a $10,000 account, then you may be forced to use the 3% or even a 4% rule. However, whatever you choose, stick to the discipline, so that you avoid risking more during certain periods. Often, after a nice winning streak, there’s a tendency in all of us to up the ante.

While I will give you specific recommendations, along with stops, your personal risk, basis your account size, should be figured at 2%, or get out on an unprofitable close. This will, generally, keep you at the 2% level. This, of course, also applies when we pyramid – which we will do in high probability situations.

Further, you should expect that we might be wrong on 50% of our recommendations. Every time I do a long-term analysis of our trading success, I find that it approaches 60-70% of trades called. On a recent account that went from $2 million to $4 million in three months, 28 trades were winners and 27 were losers. Actual analysis shows – and this is from Merrill Lynch – that you can make money trading futures with just a 30% success rate, if you use stops properly. I know you won’t believe it, but, if we hit 70% trade success, compounding profits, we can hit 1,000%/year on invested capital.

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