Never lose more than 1% of your total trading capital on any one trade. The one percent rule is something that new traders struggle to understand, but it is one of the most important dynamics of active trading.
The 1% rule does not mean only trading with 1% of your trading capital, and it doesn’t mean only risking 1% of the stock you are trading. For example, you would have thought, if you have a ₹40,000 trading account, you can only buy ₹400 worth of stock, which would be 1 percent of ₹40,000 – it does not translate like that. Let us take a look in a detailed stock trading event. If you’re trading a ₹100,000 account, then no losing trade should ever be over ₹1,000. This means that if you trade 500 shares of ABC company, with a ₹100,000 account, you can only risk ₹2 on this trade, because if ABC company drops ₹2 and you own 500 shares, you will lose ₹1,000. This is a simplified example, but it illustrates the principle.
Thus the 1% rule means you never lose more than 1% of your total trading account on any one losing trade, through the use of proper position sizing based on the right technical stop loss level for trading a particular stock or index. After you are done with demat account opening, stick to 1% rule to control losses and make profit in the long run. Novice investors must know 1% rule to extract benefit from it.
Secret Rule Secures Your Investment in Stock Market
If you make the 1% rule one of your trading habits, each trade will mathematically be 1 of the next 100 trades. It is hard to have a large drawdown in capital if a five trade losing streak results in 5% drawdown in trading capital. For bigger accounts, 1% may be too much risk per trade. If you think the rule is too strict, then your account size may well be the issue, rather than the principle. Many of the best traders believe in and practice this rule, and it makes their trading careers long and profitable. With this rule, you don’t have to fear big drawdowns or account blowups. It will remove the emotional rollercoaster from your trading, and turn it into a business. Rich traders use the 1% rule to become rich, because they never blew up their account, and even in unpleasant market conditions, they survived to trade another day. They smartly compound their earning by investing in different stocks, they rely on compound interest calculator online to know the status of their investment with possible earnings forecasts.
Secret Rule to Set the Trading Range
Know the trading range of your stock or index over the last ten days and position size accordingly. You should be able to handle a 50% increase in a trading range without having a devastating loss.
Get in the habit of position sizing for the worst case scenario, and not the best case scenario, or the status quo. Always manage risk and be ready to adjust quickly when faced with volatile markets.
Secret Rule of Probability to Cut Losses
Find the price level for your stop loss that has a high probability of never being hit, so you have the time to exit your trade profitably. Once you know where that level is, you can enter your trade when that level is near, and position size correctly so the worst case scenario is a small loss.
Many traders choose to look for the highest probability setups to take entries, but if your stop loss is a low probability exit, you have a potentially great trade because your stop loss won’t be hit, and you can let a winner run. Get in the habit of finding low probability stop losses as much as high probability setups. You can know more such secret rules when you join stock market courses online free.