Before trading real money in the markets, it is important that every trader establish for themselves what their individual risk tolerance is. For example, if a trader has decided to open a $5,000 futures trading account, here are some key questions that Rockwell Trading feels should be answered:
How much of your starting capital are you prepared to lose?
What percentage of your account will you risk on a trade?
Where will you set your daily catastrophic loss limit with your broker?
If you have a low risk tolerance, you may determine that if you lose half of your starting capital ($2,500) that you will stop trading. You might also establish that you will not risk more than 2% of your account ($100) on any given trade, and instruct your broker to shut down your trading account if you have more than a 10% drawdown ($500).
A trader with high risk tolerance may be willing to lose all their starting capital ($5,000), risk 5-10% on any given trade ($250-$500), and set-up a 50% daily catastrophic loss limit ($2,500) with their broker.
All traders must accept that losses are part of trading. Knowing your risk tolerance, and planning accordingly, will help you manage your losses as you look to grow your trading account.
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Rockwell Trading Recommendation - Risk Tolerance