Traders can typically describe the methods they use to initiate and liquidate trades. However,

when forced to describe a methodology for the amount of capital to risk when trading, few

traders have a concrete answer. Some make vague references to experts that recommended

risking one or two percent of portfolio equity on any trade. Others rely on intuition to determine

when to increase position size on a particular trade, always risking different amounts.

Experienced traders learn that as important as it is to have an effective method to determine

when to trade, it is equally important to develop a methodology to determine how much to risk. A

trader that risks too much; increases the chance that they will not survive long enough to realize

the long run benefits of a valid trading strategy. However, risking to little creates the possibility

that a trading methodology may not realize its’ full potential. Therefore, while a positive

expectation may be a minimal requirement to trade successfully, the way in which you exploit

that positive expectation will in large part determine your success as a trader. This is, in fact, one

of the greatest challenges for traders.