The Commodity Trading Game Plan



The 10% Rule in Trading

 

Many futures trading courses and literature claim that a commodity trader shouldn't risk more than 10% of their trading account on any one trade. This seems to be relatively sound advice but might, or might not, be feasible for everyone. For example, a risk averse trader may not be psychologically equipped to handle such a loss which can easily lead to irrational trading behavior. On the contrary, a well-funded-trading account might be risking a substantial amount of money if risking 10% of the commodity trading account.

Most beginners underestimate the value of psychology. Once the balance is broken it is hard to regain logic and can lead to large losses. For example, a trader that opens an account with $10,000 and immediately loses $1,000 on the first trade may dedicate subsequent trades to recovering losses sustained on the original. In other words, they are often tempted enter a market prematurely and aggressively to make up for lost ground. This behavior would demonstrate an example of a trader that simply isn't capable of taking such a large loss without detrimentally impacting the original trading plan.

An additional drawback of the 10% rule is the fact that during volatile market conditions, whether trading options or futures and depending on the risk capital available, it may not be possible to construct a trade with reasonable odds of success without surpassing the appropriate percentage. In this case, the market is often best untouched, but as humans we are naturally drawn to that of which we shouldn't.

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