If I were a young speculator with $50,000 to trade. I would take an initial position of no more than 10% of the total-$5000-and set exit points to limit potential losses to 10 to 20% of that-a $500 to $1000 loss.
In other words, I would set it up so that my losses were no more than 1 to 2% of the total risk capital.
Upon losing $1000 in the first trade, I would scale back my next opening position to $4000 and limit my losses to somewhere in the $400 to $800 range. And so forth.
On the upside, if I made $2000 on my first trade, I would bank $1000 and increase the opening size of my next position to $6000, in effect reducing my initial capital at risk ($5000) by 20%, while increasing my actual risk capital by the same amount.
That way, even if I lost on my next trade, I would still be up money for the period. Assuming that I was right in my market calls 50% of the time.
I would make a lot of money employing this strategy. And I would make a respectable living being right on only 1 out of 3 trades, provided I maintained a risk/reward ratio of, at most, 1:3.
In other words, if you pick opportunities so that the probable reward is at least three times greater than the objectively measurable potential loss, you will make profits consistently over time.
Trader Vic-Methods of a Wall Street Master
