It is important for day traders to have their trading strategies and risk management practices in place while trading. One of such risk management techniques is 1 percent risk a day. Following your own rules as a day trader makes sure that you can keep up with tough market situations while keeping the loss minimum and gains optimum. Risk management techniques help traders in many ways, which you would learn through this article.
Day Trading 1 Percent a Day
The 1 percent a day trading rule represents trading strategy where trader set risk to 1 percent of traders accounts value in a single trade. In this way, the trader can keep the maximum drawdown low.
For example, Mia is a day trader, and she is applying a 1 percent per day risk management rule. If she has $50,000 in her trading account, it doesn’t mean that her trading capabilities would be only 1% of $50,000 which is $500. The word in focus is risk management, so her loss taking appetite would be $500. In fact, she can trade even more than $50,000 using leverage techniques, but she would not lose more than 1 percent in a single trade.
It is natural that every trade can’t be won, but applying 1 percent risk management in place, traders can definitely stop getting trapped into deep downturn events. If you look closely, if you apply the 1 percent a day technique, it will take 100 failed or loss-making trades in a row for you to exhaust your trading account. This strategy is for sure very beneficial for novice traders.
1 percent a day trading rule may weigh tiny if you consider it in terms of money, but when you compare it with the return you get, you will notice significant profit. You can set your profit gaining target or risk to reward ratio at 1:1.5 or 1:2, which means for taking 1 percent risk on your trade, you have the probability of winning 1.50 to 2 percent. By taking multiple trades a day, you have chances of earning more than making losses, even if you lose half the trades.
This strategy is common strategy for a lot of traders. Usually, traders can control maximum portfolio drawdown in less than 20% in the worst case. (Learn maximum drawdown and absolute drawdown)
In this image above, we can see that if traders keep their portfolio loss in less than 10% they can easily recover any losses.
Make 1 Percent a Day Your Trading Rule
As stated above, 1 percent a day can give you higher benefits depending upon your risk to reward ratio; you can earn 2 percent a day even if your trading move is not that big. By applying stop loss on your order, you are stopping your trading account from losing more than 1 percent; it doesn’t matter whether the market goes opposite of your trade by 6 percent or 0.6 percent.
This 1 percent a day or 2 percent a day trading strategy can be used for equity as well as the forex market. Let us now understand this with an example.
Again, Mia wants to purchase a stock named ABC, which is trading at $100; she has $50,000 in her trading account. She looks at the price chart and sees the stock making a short term low at $95, so she places a stop loss at $94. It is just 1 dollar less than the current low. After identifying the stop loss position, she focuses on how many shares she can buy while keeping 1 percent a day her risk management strategy.
Considering 1 percent of $50,000, it comes at $500. So, her risk would be the difference between the stop loss price and the stock buying price – $100 – $94.00= $6.
Now to derive at the number shares, she can purchase; she divides her risk appetite by the risk she calculated earlier – $500 / $6 = 83.33. She rounds this off to 83 shares, which are the number of shares she can trade on to keep her risk-taking at 1 percent of her trading account.
In total, her trading amount would be 83 shares * $100 = $8300. So, considering she has $50,000 in her trading account, she can take around 5 such trades.
Even if the prices fall, Mia will lose only 1 percent of her trading amount, but if the price moves upward, and if she sells her share at $110, she would make 2 percent a day profit which would amount to $9130 excluding commission. If the prices go beyond $115, she can even make the profit of 3 percent, keeping her risk to reward ratio at 1:3.
The 1 percent a day trading strategy is suitable in all market conditions, and all market types. Though, you are advised to check for the slippage costs before entering the market to ensure that you actually have your trading strategy in place; otherwise, you would end up paying more than you thought. Slippage is the cost that traders pay in a trade as premium; it is the difference between the entry and the exit price.
Keep on Modifying Your Trading Strategy
Every trader has different preferences and different trading goals. While the 1 percent a day trading strategy works well for trading accounts having amounts less than $1,00,000, you can modify it to 2 percent a day if you have more trading capital. You can keep it between 1 to 2 percent as well; remember, it’s all about what suits you the best.
That applies to trade accounts having less than $1,00,000 as the capital as well; it is not necessary to risk 1 percent, they can keep their risk management tool at 0.5 or 0.75 percent, too. Please note that if it is short trading (you are selling the stock first and buying it later), even 1 percent can be very risky. Thus, choose the percentage wisely and as per your trading goals. Ideally, any percentage below 2 is considered appropriate.
The Bottom Line
The 1 percent a day trading rule is suitable to the majority of traders in various markets. As a trader, you can set your own percentage and calculate how many shares you should deal with and where the stop loss should be. This rule ensures that you are in control of your losses, and can be in the game for the long term.
Using such trading strategies, you can make sure that you have more winning games than losing ones. It would limit your capital to get vanished in a single trade. If you are still ambiguous about using such strategies, you can practice them on a demo trading account offered by various brokerage houses. Practising and implementing it would give you the needed confidence and boost for real trading; plus, you won’t lose any real money!