This tested data shows two important things.
First is how most trading gurus are wrong and the 1% rule you use will actually blow up your trading account, and the second is how you can easily become a successful trader with just one simple rule.
But to understand all this data, let me tell you how I blew up my own trading account around 10 years ago when I was a beginner trader.
It was a hot afternoon, and the sunlight was coming from the window.
I was lying belly down on the floor next to the sunlight with legs in the air and a slow laptop in front, the ultimate day trading position.
I was listening to YouTube videos in the background while taking trades on smaller time frames.
Since I started trading with a really small account, at this moment, it was around $150.
I distinctly remember this because on this day, I lost around 30% of my account in a matter of minutes.
I got so many losing trades back to back that I was down $50 on a $150 account.
I paused the background YouTube video, and as the volume dropped, I felt my soul leaving my body.
The heart started pounding.
I smelled like sweat because I was sweating heavily, and the hot afternoon didn’t help.
It was a horrible situation.
I lost all hope because it would take like 30 winning trades just to recover this loss and get back to where I was before.
I sat there on the floor in hot sweat, staring at the now $100 account, thinking what I should do next.
But then I thought, if I just wait long enough for the perfect trade, the really high probability trade, I could risk the next $50 on it to make $50 back.
This would bring the total account size back to $150 in just one trade.
It was a perfect plan.
What could go wrong?
But then I took the trade quickly and lost it in the next few minutes.
The account size was now down to only $50.
I was now struggling to breathe properly and was walking around in circles, thinking what have I just done.
I could have easily recovered that first $50 loss in a few weeks if I had just stuck with the strategy rules.
But now I am down $100, which is more than a 60% loss.
It would take months to recover from this.
I now had zero hope of recovering the loss.
It started to feel so hot that you could fill a bucket with the amount of sweat flowing out of me.
But I sat down and thought, there is only one thing that can be done.
I will risk the last fifty dollars, and if I lose that too, I will quit trading completely.
But if I win, I will be back at $100, and then I will trade nicely with rules and recover the remaining $50 slowly.
But then I took a trade and lost it within a few minutes.
The account was now down a hundred percent.
I had lost everything.
I logged out of my trading account, closed the laptop, and said to never do trading again.
A few days later, I remember it was late night, cool temperature, not sweating or smelling like one.
I was lying down listening to a trading related audiobook.
It talked about how to manage risk and other things.
And I thought, but if I had just stuck to the risk management rules after the first big loss, I wouldn’t have lost everything.
Maybe next time, if I always risk 1% of the account per trade, even after losing big, it will be impossible to ever blow the entire account.
So the next day, I was back on the trading hamster wheel.
The reason I am telling you this is because of two very important things.
First is that my loss experience is like most beginner traders’ experience.
But it didn’t happen because I broke the trading rules.
It happened because I lost all hope of recovering the big loss.
That led me to take bad actions.
And second is that if you look at this tested data, you will realize that most trading gurus are wrong about what a safe risk per trade is.
You actually have a higher chance of losing everything if you follow the popular risk management rule.
Let me ask you this.
How much do you risk per trade?
Is it 1% of the account?
If you said yes, then according to tested data, you have more than a 60% chance of blowing up your trading account.
To understand all this data like a professional trader, there are three things you need to look at.
First is how much bigger profit you book than your loss.
Let’s say you book 2 times more profit.
The second thing you need to look at is the win rate next to it.
When we are beginner traders, we don’t actually have an edge because we don’t have enough experience.
So the win rate we get is around the breakeven point.
This is the break-even win rate of booking two times more profit.
I know it’s pretty low, but things get even crazier.
The third thing you need to look at is the risk per trade.
If you risk 1% of the account per trade, look at this box.
The data says you have more than a 70% chance of losing half of your account just by following the popular 1% risk per trade.
I doubt even trading gurus who recommend using 1% risk as safe can handle losing half of their account.
If you are a beginner, you are most likely going to lose all hope and blow up everything fast.
If you use 2% or higher risk per trade, then it’s going to be a continuous hell with a 90% or more chance of losing most of your account.
This is one of the reasons why 90% of traders don’t become successful.
So how do you actually get ahead of 90% of traders?
There is only one thing you need to understand.
It’s the fact that your win rate will not be good because you are still learning.
So just use a 0.1% risk per trade.
I know this sounds like it will not make you much money.
But you are already not making money.
Using 0.1% risk per trade lowers the chances of losing big to almost zero.
You instantly start doing better than 90% of traders.
But to understand why professional traders recommend 1% or 2% risk per trade, there is only one thing you need to know.
It’s the fact that once you gain enough experience and actually have a strategy that gives around a 5% edge to your win rate, then the chances of losing more than half of your account drop to near zero.
So when you are a beginner, don’t use what professional traders use.
And once you get professional, then you can start using professional rules.
That’s how you do better than 90 percent of traders and become successful.