Ed Seykota: 5 Trading Rules That Actually Work rule 3

Rule #3: Keep Bets Small

One of the best ways to keep emotions at bay while trading is to keep bets small. If you risk too much on any one trade, fear and greed will surely find you.

Here is how Ed Seykota manages to keep his bets small:

Speculate with less than 10% of your liquid net worth. Risk less than 1% of your speculative account on a trade. This tends to keep the fluctuations in the trading account small, relative to net worth.
Notice that his risk per trade is less than 1% of his account balance. This allows you to endure losing streaks without losing your account or your nerves.
However, he also defines a percentage of his liquid net worth. This includes cash and other assets that can be readily turned into cash.

As his rule states, he’s only allowed to speculate (using his trading account) with less than 10% of his liquid net worth.
Why is this important?
Because it drives home the importance of trading with disposable income. In other words, risking money you don’t need for rent, utilities, groceries or other necessities.
I wrote about this concept, which is often referred to as trading with scared money.
When you combine all of Seykota’s rules, you will see that there is no room for trading with scared money or risking too much of your account balance. That’s a winning combination if you ask me.

He also coaches us to, Risk no more than you can afford to lose, and also risk enough so that a win is meaningful.
I have also written about the idea that a win must be meaningful. What’s interesting is that I didn’t see Ed Seykota’s comment in Jack Schwager’s book until after I’d already written a lesson on the topic.
If you want to get ahead as a Forex trader, you have to strike a balance between risking too much and not enough.
Risk too much and fear will take over. What’s worse is that you stand a good chance of losing your nerve and ultimately blowing your trading account.

But here’s the thing…

If you don’t risk enough, that setup that you waited two weeks for won’t produce a meaningful profit. When that happens, it’s easy to begin overtrading because you feel that the reward isn’t worth the wait.
The solution is to risk just enough that a profitable outcome is meaningful but not so much that a loss forces you to lose your nerve.