Managing Risk and Losses
Rule: Never lose more per day than my average per day gain. This one rule guarantees a profitable system.
Rule: Every trade must have the same risk. (video)
Rule: After a losing day start the next day with 1/2 the normal risk.
This is a risk management system that will keep the trader consistently profitable if the trading plan works about 50% of the time.
The only thing I can control in a trade is my loss amount or risk.
Cut your risk in half every after every losing day. If you have 2 consecutive losing days cut your risk in half again on the 3rd day and continue to cut the risk in half each losing day until you have a winning week.
Once you have a winning week, double your risk every other day until you're back to your original risk amount.
Every trade must have the same risk. If you take 2 trades with a $100 risk and 2 trades with a $300 risk you will likely never be consistent. The average trader that's not keeping his risk equal in every trade will end up with something like this example; 3 winning $100 trades, 1 losing $300 trade or worse.
On the reward side you need to let the winning trades run as much as possible. You can ruin your risk by not getting a full reward. If a trading plan only wins 50% of the time and you have the same risk as reward you obviously will end up with zero profit. You must let your winning amount surpass your risk level. This is called a risk reward ratio and the minimum is 1 to 1 just to break even; always go for more reward and less risk.