Teeka Tiwari

How Much Money Should You Risk?

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This is the second installment of my eight-part series aimed at making you a stronger, more confident and -- most importantly -- a more profitable investor.

Position Sizing

The classic mistake I see many investors, new and seasoned alike, consistently make is over-concentrating their capital in a single position.

In the early days of my investing career, I also made this mistake. In fact, there isn't much information out there to tell us how big our positions should be, so we must figure it out through trial and error (probably with a lot of emphasis on error).

So, I'm going to show you the best way to size your positions to save you a lot of the pain and money.

What I've learned from my own investing journey is that our position size must be determined not by how much money we hope to make, but rather by how much money we are willing to lose if we are wrong.

That's a subtle but important distinction.

My 3% Rule

Being wrong is a part of ultimately being right. The key is to make sure that, when you are wrong, you don't lose too much of your equity while you are on the road to being right.

My general rule of thumb is to risk no more than 3% of my starting equity on any individual trade.

Let's assume that you have a $40,000 account. Does this mean that you only put 3% of $40,000 into your trade?

No!