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Position Sizing / Risk Management

Right next to psychology, the next important thing for a trader to learn is good position sizing and money management. What this means is you need to have a good risk/reward ratio and you do not need to trade a large percentage of your account. The golden rule is never to trade more than 2% of your account ( I tend to trade only 1%) and to have at least 1:2 risk reward ratio. Some can go lower if you are scalping for a few cents or pips.

Paul Tudor Jones, a self made billionaire and one of the worlds best traders said this, "5:1 (risk /reward). Five to one means I’m risking one dollar to make five. What five to one does is allow you to have a hit ratio of 20%. I can actually be a complete imbecile. I can be wrong 80% of the time, and I’m still not going to lose."

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