3 RULES I would take on a Trading Island
The 3 Most Powerful Risk Management Rules – Above the rest
If I was on a trading island and I could only bring 3 Risk and Money management rules what would they be?
Ok sounds a but odd, but you know how the Island question works…
If I had to choose between only three Risk management rules I could take with my trading.
It would have to be these…
Risk management is the cornerstone of successful trading.
Rule 1: Limit Risk to MOST 2% Per Trade
One of the most crucial risk management rules is to limit the exposure on any single trade.
The rule is simple – yet powerful.
NEVER risk more than 2% of your trading capital on a single trade.
This rule will save you not only when you take a loss. But even if you took 10-15 losses in a row.
And it will help protect your account from significant losses.
Example:
Let’s say you have R50,000 in your trading account.
If you apply the 2% rule, you would risk no more than R1,000 on any trade.
This disciplined approach will even allow you to take a long string of losses (with the compounding factor), and it won’t devastate your account.
Rule 2: Restrict Open Trades to 15 at a Time
Diversification is key in trading.
But it’s equally important not to overextend yourself.
To manage risk effectively, never have more than 10 trades open simultaneously.
This rule will help you to control your exposure across the positions.
And it will help prevent an over concentration with one market or sector.
Rule 3: Halt Trading at an -18% Portfolio Drawdown
Market downturns are inevitable.
Markets go in favourable and unfavourable territory.
Thing is, we don’t know when the unfavourable territory will end.
It’s crucial to know when to pause your trading.
If your portfolio experiences an 18% drawdown (exposure of losses) from its peak value, it’s time to hit the brakes.
Halt all trading activities until the market conditions show signs of improvement.
You can demo-trade during the halted stage, to see when the markets end the bad phase.
And so you’ll know when to get back in.
WHEN TO RE-START THE 18% DRAWDOWN RULE
However, WHEN you get back in. Treat your account as if you’re starting with a NEW portfolio.
So the 18% Rule applies with the new portfolio value.
Example: Imagine your portfolio was valued at R100,000 and fell to R82,000 (-18%).
Following this rule, you’d suspend further trades until the market conditions improve.
Then you would start again trading, with the new portfolio bvalue in mind at R82,000.
This safeguard prevents emotional or impulsive decisions during a downward spiral.
And it will allow you to reevaluate and trade with a clearer perspective when the market stabilizes.
Final words:
These three risk management rules are not only powerful but also straightforward and universally applicable.
They serve as a shield, protecting your trading account from unnecessary and catastrophic losses.
When you integrate these rules into your trading strategy, you not only mitigate risks but also cultivate discipline and consistency.
And this will most definitely attribute to your long-term success in the volatile world of trading.
Let’s sum up the THREE most powerful Risk and Money Management Rules…
Rule 1: Limit Risk to MOST 2% Per Trade
Rule 2: Restrict Open Trades to 15 at a Time
Rule 3: Halt Trading at an -18% Portfolio Drawdown
Timon Rossolimos
Founder, MATI Trader
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Trade well, live free.
Timon Rossolimos
Founder, MATI Trader
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