The importance of risk management can not be overstated. But, what parameters aid the trader in his evaluation of his risk on each trade or as a portfolio? All trades should have a predetermined exit point at initiation. Rules governing the entry and exit will help alleviate the pressure of emotion and standardize trading results. It also creates the necessary parameters to measure risk and evaluate performance. This is our goal.

Stop Value
The initial stop controls the first measure of risk. Never risk more than 1 to 2% of total capital on any individual trade. Next, set a stop that includes a volatility factor. Initial stop size should expand as volatility increases and likewise contract as volatility decreases. The initial dollar amount will not change. For example, if you have 100,000 in capital then a 1000 stop for each trade is set. That would leave 1 lot for a $1000 stop in crude if your stop was 1.00. If the volatility contracts to 50 cents then your trading size will increase to 2 lots.

Risk Multiple

The initial stop size of 50 cents is your risk multiple or 1*Risk. This is your yardstick for every trade. The goal is to shave every loss to 60% of the initial risk. The average loss should be .6R. In our example that would be $600. As the trade develops, use multiples of the 1R to set goals. A simple goal for your trading is a 50% win percentage with an average win to average loss ratio of 2 to 1. If your average loss is .6R then the average win must be higher than 1.2R. The expectancy of this system is .3R= ( .3= .5(1.2)+.5(-.6) ). It doesn’t sound like much but it is enough to retire as a daytrader. Always know yout 1R and use it as a quick calculation to evaluate performance during the day nad during each trade.