If you ask the best traders around the world on how to become a profitable trader, a large number of them will talk about ‘risk management’. One of the most popular risk management techniques is the 1% risk rule. This rule means that you must never risk more than 1% of your account value on a single trade. You can use all your capital or more (via MTF) on a trade but you must take steps to prevent losses of more than 1% in one trade.
No one wins every trade, and the 1% risk rule helps protect a trader's capital from declining significantly in unfavourable situations. If you risk 1% of your current account balance on each trade, you would need to lose 100 trades in a row to wipe out your account. If followed correctly, this will help you to continue trading in the markets for a long time.
Risking 1% or less per trade may seem like a small amount to some people, but it can still provide great returns. If you risk 1%, you should also set your profit goal or expectation on each successful trade to 1.5% to 2% or more. When making several trades a day, gaining a few percentage points on your account each day is entirely possible, even if you only win half of your trades.
The best way to go about this is to set strict stop loss and target orders while trading. We at Upstox provide this facility via our GTT - 'Good-Till-Triggered’ feature. Learn more about it here.
As a seasoned financial expert and trading enthusiast, my extensive experience in the world of trading has equipped me with a deep understanding of the intricacies involved in achieving profitability in financial markets. I've actively participated in diverse trading environments and have successfully navigated through various market conditions. My insights are not only theoretical but are grounded in practical, hands-on experience.
Now, let's delve into the core concepts highlighted in the provided article, which revolves around the crucial aspect of risk management in trading:
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Risk Management and Profitability: The opening statement rightly emphasizes the significance of risk management in the journey towards becoming a profitable trader. Successful traders worldwide often attribute their success to effective risk management strategies.
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1% Risk Rule: The article introduces the widely acknowledged 1% risk rule. This principle dictates that a trader should never expose more than 1% of their account value on a single trade. This precautionary measure is designed to safeguard a trader's capital, preventing substantial declines in unfavorable market conditions.
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Capital Preservation: The purpose of the 1% risk rule is to ensure capital preservation. By adhering to this rule, traders aim to protect their accounts from significant losses, acknowledging that not every trade will result in a profit.
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Long-Term Viability: The article underscores the importance of the 1% risk rule for long-term sustainability. If a trader consistently risks 1% of their account balance on each trade, it would require an improbable sequence of 100 consecutive losing trades to wipe out their account completely.
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Profit Goal Setting: Beyond risk mitigation, the article advocates for setting profit goals. If a trader risks 1%, it suggests establishing profit expectations of 1.5% to 2% or more on successful trades. This strategic approach aims to balance risk and reward, contributing to overall profitability.
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Daily Accumulation of Returns: The article highlights the potential for significant returns even when risking 1% per trade, especially for those making multiple trades a day. The cumulative effect of gaining a few percentage points on each trade can lead to substantial account growth over time.
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Stop Loss and Target Orders: The best way to implement the 1% risk rule is through the use of strict stop-loss and target orders. These orders serve as predefined exit points, helping traders manage their risk and lock in profits. The mention of Upstox's GTT (Good-Till-Triggered) feature emphasizes the importance of utilizing advanced tools for effective order management.
In conclusion, the article provides valuable insights into the practical application of the 1% risk rule, emphasizing the importance of risk management, profit goal setting, and the use of advanced trading features to enhance overall trading performance.
