IMPORTANT - 14 Risk and Money Management Rules
Over the past 20+ years, I've only mentioned a few money management rules.
But then I thought about it, and realised there are so many more I use when I trade.
So with this TradingView platform, I’m going to share my 14 most essential risk management rules I’ve ever come across.
RULE #1: The 2% Rule – Limit Your Risk
You might have seen this risk rule from me before, but there are new TradingView members everyday.
Here’s how it works…
Never risk more than 2% of your total trading capital on a single trade.
No matter how good the trade looks, this rule will help you safeguard your portfolio from the impact of a single trade's outcome.
The reason is, you will enter a losing streak.
You will most likely take from five to seven losing trading in a row.
But with the 2% rule, you’ll only be down 10% to 14% of your portfolio compared to if you risked 5% to 10% per trade.
RULE #2: The Probability Rule – Assess Trades
When you buy or sell trades, there are three types that can line up according to your trading strategy.
I like to categorise these trades as.
High, medium, or low probability.
For high, medium, and low probability trades, risk 2%, 1.5%, and 1% of your portfolio respectively.
If my trading criteria matches all the right elements to buy or sell – this is considered a high probability trade.
That’s where I will risk 2% of my portfolio per trade.
If my trading criteria has one or two elements that are showing conflicting signals – this will be considered a medium probability trade.
In this case, I’ll only risk 1.5% of my portfolio.
Other cases, there’ll be a time where the system will line up but the market environment is in a choppy and volatile range.
This is where the trade will be a low probability trade. And so, I’ll only risk 1% of my portfolio per trade.
Identify the probabilities and you’ll be able to adjust your risk accordingly.
RULE #3: 20% Drawdown Rule – Pause After Losses
There could be a time, where your portfolio is in the slums.
This is where you could be down 14% to 20% of your portfolio.
What then?
Well you need to protect your capital.
I have a simple rule where, once my portfolio is down 20% of my portfolio – I will pause my trading.
During a drawdown, I’ll then switch to paper trading until conditions improve.
If the market resumes in favourable territory and I feel more confident that the system will work better – I’ll then resume trading with 1% risk.
RULE #4: Never Risk Unaffordable Money
This one is a given, and one I often preach.
With trading you should NEVER risk any money you can’t afford.
If you’re using your only savings from retirement or you have any money that you’ll be emotionally attached to - Avoid trading all together.
This is not only dangerous for your financial situation but it will also lead to a rollercoaster of emotions trading during both winning and losing streaks.
RULE #5: The Time Stop-Loss Rule – Time-Based Limits
If a trade doesn't meet its profit target (or hits the stop loss) within a specific timeframe, close it.
I have a 7 week (35 business days) rule.
It doesn’t matter when, what level or if the trade is in the money or out the money.
You want to close the trade, after a certain period of time has elapsed, for three reasons.
1. You’re a short-term trader and don’t want to turn it into a long term investment
2. There are costs you are paying daily which is leading you to incurring a higher loss or less profits.
3. You don’t want to feel married to any specific trade.
Either you’ll bank a lower loss than you planned. Or you will bank a lower profit than planned.
This prevents capital from being tied up in stagnant trades.
RULE #6: The Trailing 1:1 Rule – Protect Profits
This rule, will help you secure your profits when a trade is moving in your favour.
Here’s how it works.
Once a trade hits a 1:1 risk-reward ratio (and has moved in my favour).
It gives the opportunity to move the stop loss up to just above break even.
This way you’ll will bank a minimum gain, should the trade turn against you.
Also, it will increase your win rate and emotionally you’ll feel it’s much easier to hold a trade with nothing to lose.
RULE #7: Half Off Rule – Secure Gains
Sometimes, you don’t want to move your stop loss.
Instead you want to lock in profits, while the market is moving in your favour.
So the rule is simple.
When the trade reaches the risk to reward of 1:1, this might be the best time to close half your position.
This will lock in some profits while leaving room for further gains.
RULE #8: The 5% Margin Rule – Control Leverage
This rule is more applicable to those who have a MUCH larger account of R25,000 and up.
Remember, with trading you’re buying and selling on margin.
If the gearing is 10 times this means if I hold 1% of my account, I am risking 10% of my portfolio if the trade heads to zero.
So, the trick is to never risk more than 5% of your account on a single trade.
This approach reduces exposure to risk and aids risk tracking in volatile markets.
RULE #9: The Intraday Stop Rule – Daily Loss Limit
Not all traders like to hold overnight.
You get intraday traders who buy and sell trades within the day.
If you are one of them, then this rule is for you.
Make sure you set a daily loss limit or a maximum number of losses.
For example, if you’re down 3 to 4 trades in the day – that might be your que to stop trading for the day. There are a few reasons for this including:
• The market environment is not conducive to continue.
• You need to protect your capital.
• Your emotions might run out of control having taken too many losses in a day.
• This could result in impulsive and revenge trading to try make up for your losers.
RULE #10: Forex NEWS Rule – Avoid High-Impact News Events
I mentioned this in the last Trading Tips Q&A, but I’ll say it again.
If you’re a Forex trader and you want to avoid volatile times when certain news events come out.
You can stay out or avoid trading during high-impact news events.
These events include CPI, NFP, PPI, and FOMC releases.
Such events can increase trading risks and lead to unpredictable market movements. (Especially in the Forex market!).
RULE #11: The Risk-Reward Rule – Favor Positive Ratios
Whenever I take a trade, I always want my gains to be bigger than my losses.
To do this I set my risk-reward ratio of at least 1:2.
This means, I am only willing to risk one in order to bank two times more.
Do this enough times and you’ll almost guarantee your potential gains will outweigh your potential losses in the medium term.
And having a risk to reward of at least 1:2 means you’ll factor in the costs, brokerage and other fees with your trade.
RULE #12: The 20% Golden Rule – Diversify and Limit Exposure
You always need to have capital within your portfolio.
Not only to trade, but to protect the current trades that you’re holding at any one time.
So this rule is golden.
Here’s how it works. I never expose more than 20% of my total investment portfolio to trading.
This means, I’ll always be holding at least 80% of my portfolio.
Remember, with margin (leverage) trading, it magnifies gains and losses.
Having only 20% of your total investment portfolio will help you to always have more money in your portfolio to account for more trades, losses, costs and for you to diversify and manage your risk better.
RULE #13: The Hedgehog Rule – Balance Long and Short Positions
I love this rule.
In trading you can buy (go long) when the market moves up.
Or you can sell (go short) when the market moves down.
But sometimes, you might feel you’re over exposed to the long side even though the market is moving up.
So instead you can hedge your positions by balancing longs and shorts.
If the market turns down, then at least you’ll have some shorts in the mix to make up for the losses with your longs that are going against you.
I always try to avoid overcommitting to a single direction.
This way I am able to protect my portfolio from sudden market reversals.
RULE #14: Multi-Account Rule – Separate Markets
I find markets all move differently and yield results at different rates.
So what I like to do is open different trading account for different markets (e.g., Forex and stocks).
I like to track and trade Forex for one account and stocks for another.
You’ll find if you trade too many different markets in one account, it will most likely skew the portfolio and your track record.
This is because of the way they all move sporadically from each other.
So, diversify your portfolios across different asset classes and markets to manage your risk.
Final words.
I trust this 14 Risk management Rules Lesson will help guide you to your trading goals.
If there’s one thing you should do is print, or save this guide and keep them close for reference.
These rules will undoubtedly prove valuable in your trading endeavors.
But then I thought about it, and realised there are so many more I use when I trade.
So with this TradingView platform, I’m going to share my 14 most essential risk management rules I’ve ever come across.
RULE #1: The 2% Rule – Limit Your Risk
You might have seen this risk rule from me before, but there are new TradingView members everyday.
Here’s how it works…
Never risk more than 2% of your total trading capital on a single trade.
No matter how good the trade looks, this rule will help you safeguard your portfolio from the impact of a single trade's outcome.
The reason is, you will enter a losing streak.
You will most likely take from five to seven losing trading in a row.
But with the 2% rule, you’ll only be down 10% to 14% of your portfolio compared to if you risked 5% to 10% per trade.
RULE #2: The Probability Rule – Assess Trades
When you buy or sell trades, there are three types that can line up according to your trading strategy.
I like to categorise these trades as.
High, medium, or low probability.
For high, medium, and low probability trades, risk 2%, 1.5%, and 1% of your portfolio respectively.
If my trading criteria matches all the right elements to buy or sell – this is considered a high probability trade.
That’s where I will risk 2% of my portfolio per trade.
If my trading criteria has one or two elements that are showing conflicting signals – this will be considered a medium probability trade.
In this case, I’ll only risk 1.5% of my portfolio.
Other cases, there’ll be a time where the system will line up but the market environment is in a choppy and volatile range.
This is where the trade will be a low probability trade. And so, I’ll only risk 1% of my portfolio per trade.
Identify the probabilities and you’ll be able to adjust your risk accordingly.
RULE #3: 20% Drawdown Rule – Pause After Losses
There could be a time, where your portfolio is in the slums.
This is where you could be down 14% to 20% of your portfolio.
What then?
Well you need to protect your capital.
I have a simple rule where, once my portfolio is down 20% of my portfolio – I will pause my trading.
During a drawdown, I’ll then switch to paper trading until conditions improve.
If the market resumes in favourable territory and I feel more confident that the system will work better – I’ll then resume trading with 1% risk.
RULE #4: Never Risk Unaffordable Money
This one is a given, and one I often preach.
With trading you should NEVER risk any money you can’t afford.
If you’re using your only savings from retirement or you have any money that you’ll be emotionally attached to - Avoid trading all together.
This is not only dangerous for your financial situation but it will also lead to a rollercoaster of emotions trading during both winning and losing streaks.
RULE #5: The Time Stop-Loss Rule – Time-Based Limits
If a trade doesn't meet its profit target (or hits the stop loss) within a specific timeframe, close it.
I have a 7 week (35 business days) rule.
It doesn’t matter when, what level or if the trade is in the money or out the money.
You want to close the trade, after a certain period of time has elapsed, for three reasons.
1. You’re a short-term trader and don’t want to turn it into a long term investment
2. There are costs you are paying daily which is leading you to incurring a higher loss or less profits.
3. You don’t want to feel married to any specific trade.
Either you’ll bank a lower loss than you planned. Or you will bank a lower profit than planned.
This prevents capital from being tied up in stagnant trades.
RULE #6: The Trailing 1:1 Rule – Protect Profits
This rule, will help you secure your profits when a trade is moving in your favour.
Here’s how it works.
Once a trade hits a 1:1 risk-reward ratio (and has moved in my favour).
It gives the opportunity to move the stop loss up to just above break even.
This way you’ll will bank a minimum gain, should the trade turn against you.
Also, it will increase your win rate and emotionally you’ll feel it’s much easier to hold a trade with nothing to lose.
RULE #7: Half Off Rule – Secure Gains
Sometimes, you don’t want to move your stop loss.
Instead you want to lock in profits, while the market is moving in your favour.
So the rule is simple.
When the trade reaches the risk to reward of 1:1, this might be the best time to close half your position.
This will lock in some profits while leaving room for further gains.
RULE #8: The 5% Margin Rule – Control Leverage
This rule is more applicable to those who have a MUCH larger account of R25,000 and up.
Remember, with trading you’re buying and selling on margin.
If the gearing is 10 times this means if I hold 1% of my account, I am risking 10% of my portfolio if the trade heads to zero.
So, the trick is to never risk more than 5% of your account on a single trade.
This approach reduces exposure to risk and aids risk tracking in volatile markets.
RULE #9: The Intraday Stop Rule – Daily Loss Limit
Not all traders like to hold overnight.
You get intraday traders who buy and sell trades within the day.
If you are one of them, then this rule is for you.
Make sure you set a daily loss limit or a maximum number of losses.
For example, if you’re down 3 to 4 trades in the day – that might be your que to stop trading for the day. There are a few reasons for this including:
• The market environment is not conducive to continue.
• You need to protect your capital.
• Your emotions might run out of control having taken too many losses in a day.
• This could result in impulsive and revenge trading to try make up for your losers.
RULE #10: Forex NEWS Rule – Avoid High-Impact News Events
I mentioned this in the last Trading Tips Q&A, but I’ll say it again.
If you’re a Forex trader and you want to avoid volatile times when certain news events come out.
You can stay out or avoid trading during high-impact news events.
These events include CPI, NFP, PPI, and FOMC releases.
Such events can increase trading risks and lead to unpredictable market movements. (Especially in the Forex market!).
RULE #11: The Risk-Reward Rule – Favor Positive Ratios
Whenever I take a trade, I always want my gains to be bigger than my losses.
To do this I set my risk-reward ratio of at least 1:2.
This means, I am only willing to risk one in order to bank two times more.
Do this enough times and you’ll almost guarantee your potential gains will outweigh your potential losses in the medium term.
And having a risk to reward of at least 1:2 means you’ll factor in the costs, brokerage and other fees with your trade.
RULE #12: The 20% Golden Rule – Diversify and Limit Exposure
You always need to have capital within your portfolio.
Not only to trade, but to protect the current trades that you’re holding at any one time.
So this rule is golden.
Here’s how it works. I never expose more than 20% of my total investment portfolio to trading.
This means, I’ll always be holding at least 80% of my portfolio.
Remember, with margin (leverage) trading, it magnifies gains and losses.
Having only 20% of your total investment portfolio will help you to always have more money in your portfolio to account for more trades, losses, costs and for you to diversify and manage your risk better.
RULE #13: The Hedgehog Rule – Balance Long and Short Positions
I love this rule.
In trading you can buy (go long) when the market moves up.
Or you can sell (go short) when the market moves down.
But sometimes, you might feel you’re over exposed to the long side even though the market is moving up.
So instead you can hedge your positions by balancing longs and shorts.
If the market turns down, then at least you’ll have some shorts in the mix to make up for the losses with your longs that are going against you.
I always try to avoid overcommitting to a single direction.
This way I am able to protect my portfolio from sudden market reversals.
RULE #14: Multi-Account Rule – Separate Markets
I find markets all move differently and yield results at different rates.
So what I like to do is open different trading account for different markets (e.g., Forex and stocks).
I like to track and trade Forex for one account and stocks for another.
You’ll find if you trade too many different markets in one account, it will most likely skew the portfolio and your track record.
This is because of the way they all move sporadically from each other.
So, diversify your portfolios across different asset classes and markets to manage your risk.
Final words.
I trust this 14 Risk management Rules Lesson will help guide you to your trading goals.
If there’s one thing you should do is print, or save this guide and keep them close for reference.
These rules will undoubtedly prove valuable in your trading endeavors.
✅ Facebook:
facebook.com/groups/matitrader
🌐Website:
timonandmati.com
𝕏 (Formerly Twitter):
twitter.com/timonr
Trade Well,
Timon Rossolimos
Founder, MATI Trader
(Pro trader since 2003)
facebook.com/groups/matitrader
🌐Website:
timonandmati.com
𝕏 (Formerly Twitter):
twitter.com/timonr
Trade Well,
Timon Rossolimos
Founder, MATI Trader
(Pro trader since 2003)
Disclaimer
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