Risk management and the number of lots to trade.

Risk management is a very important aspect of your trading strategy. Even if you have the best technical or fundamental strategy, poor risk management will wipe out your investments very quickly. What makes this even more frustrating is that you might be able to trade very successfully for a while just to have your hard won gains wiped out in one or a couple of trades.

Managing a  consistently growing portfolio is about a lot of patience and the basics:

• Your profit trade % must be above 50%. 
• Obviously the higher above 50% the more your growth. 
• You should however not be too greedy. I always aim for a profit % of around 60%
• Your average profit should be higher than your average losses.
• A good standard to look at here should be that your average profit should be 80% higher than your average losses.

Now we get to the most common trading error and that is to increase your number of lots traded to aggressively. It is very tempting to increase the lots when you are in a long consecutive trading run - it appears so easy and my strategy must be working so why not speed up things a bit. Believe me I have been there, this is a sure way to disaster.

Plan when you will increase the number of lots traded and stick to this plan no matter what.

In my opinion there is a number of fundamentals that you can base your lots strategy on:

• Total investment portfolio value
• Example - Increase your trades with 0.1 lots for every $1000 in your total portfolio.
• This could become problematic as you increase your portfolio growth and when you take a couple of losses you have to decrease your lots again. Personally I have found this strategy very frustrating as you seem to hover between the current and next lot quantity forever. This will be especially true when you are starting out and the number of lots traded are quite small.
• Total investment made
• Example - Trade 0.1 lot for every $1000 dollars invested in your portfolio.
• The benefit of this strategy is that you will manage your risk very well and will over a shorter time get your investments back.
• On the negative side you will depend on consistent investments to grow the lots traded and therefor miss out on all the benefits that compounding will bring. 
• This strategy can be followed if you have a limited investment that you will make over a limited time and if you have a conservative approach.
• Time
• Example - Increase your lots trade annually  with half  the percentage of the profit made in the last 12 months. If you made profit of 50% in the last 12 months, then increase your lots traded with 25%.
• This approach will require patience, but will give you the benefits of compounding over time while managing your risk

The best approach that I have found is to combine the "Total investments made" and "Time" strategies discussed above. When you start out, start small and follow these strategies in a very disciplined way. If you do you will achieve your goals but it will take 10 years even if you start small. 

Remember consistency and discipline is the only way to ensure long-term success - Compounding will take care of the rest.

All the best

Chris