Most traders who enter the market, destroy their portfolios within a short period of time.
They are simply oblivious to the trading risks and realities.
If they just knew a few essential money management rules, they would avoid this scenario and keep their portfolio afloat.
2% Rule To Follow With Every Spread Trade
My rule is very simple.
With any high or medium probability trade, I’ll never risk more than 2% of my portfolio per position.
With any trading strategy, there’ll be times when you go through a few months of downside.
During this environment, it’s normal to endure up to eight losing trades in a row.
If you risk 10% of your portfolio per trade, excluding compounding, you’ll blow 80% of your portfolio.
Not only will your portfolio be almost bust, you’ll also have a pang of emotions of doubt, frustration and you’ll feel like trading is just another scam.
Successful trading is a longevity game and that’s why I adopted the 2% rule to prevent this situation.
Instead of being down 80%, I’ll only be down 16% of my portfolio (8 trades X 2% risk per trade).
With BlackStone Futures,you can spread trade using the 2% rule and protect your portfolio at the same time.
NOTE:If the term Spread Trading is new to you, click here to catch up before you continue…
How To Spread Trade Using The 2% Rule
Let’s say you have a portfolio of R100,000.
With the 2% rule, your max risk per trade will be R2,000 (R100,000 X 0.02).
Here are the specifics for the trade
Portfolio value: R100,000
2% Max risk per trade: R2,000
Entry price: 40,000c (R400)
Stop loss price: 35,000c (R350)
Take profit price: 50,000c (R500)
Now you’ll need to calculate the Rands risked per 1 cent movement.
To do this, you’ll need the:
- Max risk per trade
- Entry price
- Stop loss price
The difference between the Entry price and the Stop loss price is 5,000c (R50.00). This is your Risk in trade.
Here’s the calculation for the rands risked per 1 cent movement.
Rands risked per cent = 2% Max risk per trade÷ Risk in trade
= R2,000 ÷ 5,000c
This means every 1 cent the Sasol share price moves, you’ll make or lose 40 cents.
In your MetaTrader 4 platform, they use the term ‘Volume’, instead of Rands risked per cent. Next to ‘Volume’ you’ll type 0.40.
Once you put in your levels with the Volume of R0.40, if the Sasol trade hits your stop loss, you’ll lose R2,000 (5,000c X R0.40).
What You’ll Gain In The Spread Trade
If the Sasol trade hits the take profit at 50,000c, you’ll end up banking R4,000 (10,000c X R0.40).
Whether your portfolio is at R1,000, R100,000 or even R10,000,000, these calculations work exactly the same.
In the next article, I’ll send you a special Spread Trading Calculator and explain how you can use the 2% rule.
“Wisdom yields Wealth”
Analyst, BlackStone Futures