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      Course Overview
      • Risk Aversion
      • Misconceptions of Taking Losses
      • The 2% Rule
      • Controlling Risk
      • Proper Position Size
      • System-Based vs. Discretionary Trading
      • Setting Realistic Expectations
      Trade and Risk Management
      You completed this course.Get Completion Certificate

      Controlling Risk

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      Let’s take a look at how controlling risk with the 2% Rule works vs. an even tighter 1% Rule. Table 3 shows what your account would look like after a five-in-a-row losing streak—something an active trader could experience in a single day. Note how the fixed percentage rule reduces the size of each succeeding trade, which slows your account’s decay when you experience a losing streak.

      2% Rule vs. 1% Rule in a Five-Trade Losing Streak (dollars, exclusive of commissions)
      Starting Amount 2% at Risk Ending Amount 1% at Risk Ending Amount
      $50,000 $1,000 $49,000 $500 $49,500
      $49,000 / $49,500 $980 $48,020 $495 $49,005
      $48,020 / $49,005 $960 $47,060 $490 $48,515
      $47,060 / $48,515 $940 $46,120 $485 $48,030
      $46,120 / $48,030 $922 $45,198 $480 $47,550

      Table 3

      Making Up for Trading Losses

      Account losses are inevitable when you are trading futures. And, when you encounter a losing streak, you have to build back your earnings to get back where you were when you started. Mathematically, the amount you have to gain will be larger than the amount you lost. Table 4 shows in percentage terms the gain you must recover to make up for a similar loss.

      Making Up for Trading Losses (percent)
      Loss Recovery Gain
      10 11.11
      20 25
      30 42.85
      40 66.66
      50 100
      60 150
      70 233
      80 400
      90 900
      100 Broke!

      Table 4


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