There are no fixed rules in trading, and everyone follows the strategies and trading plans that work specifically for them. However, there is one important concept that everyone should remember: what matters is how much you lose, not how much you earn. If a trader builds up their account, but then risks 100% of their funds in a deal and loses, it is not a successful trader. That is why today we will look into the question of what the ideal amount of investment might be and why.
Long-term investing and savings
Investing and savings might be a way to potentially grow revenue overtime and the amount of investment may depend on the investor’s age, income, determination and other factors. When it comes to long-term investing, there are different numbers that specialists advise on. But the number that is considered to be appropriate by many experts for long-term savings or investment is 10 – 15% of the annual income. With that said, it is an amount that might be put in savings, but it is definitely not the amount with which one should trade. Unlike savings, trading is highly risky and it can result in losses. Let’s see what the right investment amount could be for trading.
Investment amount in trading
Talking about trading, there is one risk management rule that is, possibly, the most important one. If a trader continuously loses a significant part of their trading balance, no matter the payouts they make, very soon there will be nothing left of their capital. It is just simple math. Trading with 10-15% of the capital could lead to substantial losses that will be hard to recover from.
According to professional traders, the optimal and balanced investment amount in a deal is 1-3% of a trader’s capital. For example, if your deposit is $100, the investment in a deal should not exceed $3 for a balanced risk management strategy. But it doesn’t mean that this amount stays fixed as your balance grows. The investment is always a percentage of the capital, so if the capital grows, the investment amount grows with it.
Another way of implementing this rule is for example to exit deals as soon as the loss amount approaches 1-3%. However, this would be harder to control, unless a stop loss level is set, but even then it is easy to get carried away, so cautious traders might want to stick with a lower investment amount instead.
Pros and cons
Why is this approach favored by experienced traders? This rule helps a trader manage the amount of losses and doesn’t let them lose all capital in one trading session. No trader wins every single time and investing only a small percentage of the balance is a good way to potentially manage losses.
However, this rule may go against certain trading approaches like Scalping, so traders whose trading style depends on investment amount variations should think about their trading plan ahead of time and set their own risk management rules.
Note, that even with the lower investment amount, a trader may still experience losses, so it is necessary to combine it with other risk management techniques.