Chapter 1 The Art of Cutting Risk
Let’s consider two traders, Trader A, and Trader B. Both start with an equity balance of $10,000 and risk 2% per trade. However, their approach to managing losses is different.
Trader A sticks to risking 2% per trade, regardless of the outcome of the previous trade. After eight consecutive losses, Trader A’s account draws down by 13%, a loss of $1,300.
Trader B, on the other hand, adopts a different strategy. After the first loss, Trader B cuts the risk in half, risking only 1% on the next trade. If this trade also results in a loss, the risk is cut in half again, down to 0.5%. This approach continues, with Trader B halving the risk after each loss. After eight consecutive losses, Trader B’s account draws down by only 5%, a loss of $538.
