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The 5% Money Management Rule

The 5% Money Management Rule

2010-10-21 21:51:00
Richard Krivo, Trading Instructor
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Student’s Question:

I've read somewhere that you should risk no more than 5% per trade. I've been trading 3% per trade and probably open 4 positions a day. So I've been risking 12% per day. Listening to one of your webinars on this 5% topic, should I then risk 1.25% per trade (5% in total)? I was always under the impression that "no more than 5% per trade" meant every trade you open should not be risking more than 5% of your account.eg. $1000: 1st trade: can risk $50, 2nd trade (first trade still open): can still risk $50, etc.

Instructor’s Response:

The 5% rule pertains to the TOTAL amount of the account balance at risk at any one time...NOT on any individual trade. So, if you have one trade open, 5% is the maximum allowable risk. If you have two trades open it would 2.5% per trade and so forth. Think of it this way, if it were 5% per trade, a trader could open five trades risking 5% on each trade and still be within the rules. What would prevent a trader from opening up ten trades and only risking 5% on each one? There has to be something that prevents the trader from over leveraging their account and that something is the “5% risk at any one time” part of the rule. Otherwise, as you can see from the previous 5% per trade example, the trader with five trades with 5% account risk on each one would have 25% of their account at risk and the trader with ten trades would have had 50% of their account at risk. Clearly, neither of those would be a situation in which a prudent trader would want to find themselves

Learn more about the 5% rule and determine the appropriate leverage for your account:

How to Determine Appropriate Effective Leverage

Lesson 1 Money Management Video

--- Written by Richard Krivo, Trading Instructor

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