How much should one risk per trade?

[Jacob 10]

I keep reading about different ways to manage risk. For example, one common rule I read about is to risk no more than 2% of your capital and taking a break after losing 10% per month.

 

Do you guys use a fixed percentage when calculating risk?

[Soultrader 12]

I keep reading about different ways to manage risk. For example, one common rule I read about is to risk no more than 2% of your capital and taking a break after losing 10% per month.

 

Do you guys use a fixed percentage when calculating risk?

 

 

It really depends on your account size and risk tolerance. I am comfortable risking 10 points per trade. For a $10k account that is approx 0.5% risk when trading one contract.

 

I would not risk 2% on a $10k acccount per contract. My rule is to trade one contract per $10,000. So the risk always stays low.

[ES 10]

2% sounds alright if you are swing trading. I prefer to use a tighet stop when day trading though.

 

Using a fixed percentage isnt bad at all. Although depending on your setup you should be able to adjust it accordingly. Some trades may not require 2% risk. Hope this helps.

[Lisa 10]

Jacob, just make sure you don't overtrade and risk too much that can cripple your account. Risking 2% a trade is okay... but what if you lose 10 trades in a row? That is 20% loss of your capital.

 

Now you will need to make 25% of your capital to break even. Make sure you have reliable setups. Good luck

[Soultrader 12]

Let's say you are willing to risk 2% of your capital per trade.

 

First thing you need to know is your exit stop loss point. In this example, let's say you are trading a stock XYZ currently priced at $100 even. Keep this in mind, a 1 point movement in a $100 stock (1%) represents a small percentage compared to a 1 point movement in a $10 stock (10%). Use a wider stop for a high priced stock and a tighter stop for a lower priced stock.

 

Let's say you are willing to risk $5 on this trade. Thus your stop loss point per trade = $5.

 

If you have a trading capital of $100,000; 2% risk is equivalent to $2000.

 

To calculate your maximium position size:

 

(2% Risk / Stop Loss Point Per Trade ) = Maximum position size

 

$2000 / $5 = 400 Shares

 

This is an appropiate position size. You should always know how much money you may lose before looking at the profit side.

[ihashishin 10]

hi i needed some help/opinions regarding position sizing

 

i've been going over my trades (been trading for two years):

turns out i started slipping mid oct so its been one month, coicedentally thats also when the index started falling. also since the first of october ive been trying some position size variations - i've been giving my positions sizes ranging from

aggressive (10% < aggressive <= 25%) to

timid (2.5% < timid < 10%)

 

what i think has happened is that even though my calls are still 60% correct the varying position sizes have amplified my losses (down -5% this month to date (largest loss since feb2008 to date)) they also amplified my profit (my high for the month was +8% which is the highest i have had during a month in the last one year)

 

dont know if that trade off of risk/reward is worth the swing of 13%, for now ive scaled all my positions below 5% as my confidence seems to have been effected...

 

your opinions/comments would be extremely helpful concerning the trade off between volatility and performance

 

thanks

 

*PS

1. i dont use any leverage,

2. trade based on delivery in the karachi stock exchange.

3. i beat the index both years that i have been trading

Edited November 19, 2009 by ihashishin
adding back ground information

[BlowFish 10]

The key thing is (imho) risk of ruin. TradersCALM - risk of ruin menu is a great little site that describes it well.

[DugDug 10]

You can read endless amounts of maths and theory regards money management and position sizing - and I would always suggest you do.

 

Basics - risk a % of equity per trade, be consistent, trade your equity, incorporate a measure of volatility into this (eg ATR)

 

But I think Ed Sekoyta summed it up best in not just theory and maths, but in a quote something of the sort - "make sure you have enough heat at risk that its worth while"

 

ie; risk enough that makes the returns worth it, but not enough that you risk ruin, and be comfortable with the risk. There is not much point being a conservative risk taker and risking 2% per trade - you will be too mentally challenged by losses.

 

Plus - dont change the amounts at your whim - thats when you will get into trouble. Be consistent.

[electroniclocal 10]

There is a great book by Van Tharp: Trade Your Way to Financial Freedom, Van Tharp, Book - Barnes & Noble

Van Tharp coined the idea of R-multiples and looks at the answer to your question in a lot of detail. The link above lets you look into the book and see a lot more. The maths of trading are critical to your success in being profitable. I'm teaching my daughter to trade and one of the reasons I use range bars in my trading is so I can make my risks per trade uniform easily and position size easily. I don't need to think about my stop - I know its two bars. Its part of my trading plan and setup. You can see examples in the blog I use for my daughter:

electroniclocal.blogspot.com. We had a short trade at 1099.75 today that you will be able to see on a chart in today's blog later this afternoon.

[Moyyim 10]

Hmm....A mention of Ed Seykota in one post..followed by Van Tharp in the next post forces me to post this little (abridged) interchange between the two which I found somewhat amusing....(taken from Ed's website)

 

 

Thu, 2 Mar 2006

Message From Van Tharp

Hi Ed

 

Please find attached a couple of paragraphs for the upcoming book and the questions for you.....

 

Van: "Position sizing is by far the most important aspect of your trading system...."

Ed: "I do not hold any one element, such as position sizing, to be the most important element in trading."

Van: "If you could give me ten rules to consider with respect to position sizing what would they be?"

Ed:

1. Bet high enough to make meaningful profits when you win

2. Bet low enough so you are ok financially and psychogically when you lose.

3. If (1) and (2) dont overlap, dont trade.

4. Don't go adding a bunch of rules that dont work, just so you have 10 rules.

 

 

Wed, 29 Mar 2006

Wants to Publish a Second Edition

Hi Ed,

 

"We're about to release a second edition to Trade Your Way to Financial Freedom....I've always respected the work you've been doing with traders and thought of you as one of the three people who taught me the most about position sizing (which at the time was called money management )......

As a result, I'd like to include a very short interview with you......"

 

Ed's response: "You might also consider adding a chapter to your book about your own personal experiences with Trading. Otherwise, you might consider amending your title to Writing Your Way to Freedom.

 

 

C'mon Ed, Dont hold back...let us know what you really think..:rofl:

 

 

and then, as to the endorsement on the rear cover ...

Ed states (25 May 2007) : ".. The back cover of [Names]'s latest book carries a bogus endorsement from me.....I wonder how much of the stuff inside is real..."

 

 

Ho Hum....

[zdo 20]

Jacob,

The answer is highly system specific and those who generalize ‘best’ levels from their own specific systems aren’t really helping you or anyone else. For some systems, routine 40% drawdowns are appropriate. Otoh, some systems shouldn’t let more than ‘coffee money’ go – ie way under 2% per trade, etc. See the extremes? Both extreme answers are correct – when the underlying system is considered first.

 

You're really asking two questions. One is about size. The other is about stops. Know the best numbers for your system. The Q and A is paramount to survival and thriving. Be aware things like - The best fit fixed percentage is unlikely to be the best fit fixed percentage a year (month, week, whatever) from now…

 

One way of dealing with these quesitons (not necessarily the best btw): Viable systems have a (variable sized, but usually surprisingly small) sweet spot outside risk of ruin and somewhere under optimum f. (A few systems can be ‘overclocked’ / have limits pushed twd opt f, but they are rare. Running at optimal f is usually more like running at Maximum F'd ) See Money Management Strategies for Futures Traders Nauzer J. Balsara etc.

[electroniclocal 10]

Differences of opinion is what makes the market. You definitely shouldn't believe anything you read without verifying it for yourself.

 

There was a TV show years ago called Banachek (??) with George Peppard and I think that this even paraphrases one of his transliterated eastern european sayings.

Edited November 20, 2009 by electroniclocal
typo

[robertm 10]

There is a great book by Van Tharp: Trade Your Way to Financial Freedom, Van Tharp, Book - Barnes & Noble

Van Tharp coined the idea of R-multiples and looks at the answer to your question in a lot of detail. The link above lets you look into the book and see a lot more. The maths of trading are critical to your success in being profitable. I'm teaching my daughter to trade and one of the reasons I use range bars in my trading is so I can make my risks per trade uniform easily and position size easily. I don't need to think about my stop - I know its two bars. Its part of my trading plan and setup. You can see examples in the blog I use for my daughter:

electroniclocal.blogspot.com. We had a short trade at 1099.75 today that you will be able to see on a chart in today's blog later this afternoon.

 

You beat me to it :-D. I was fortunate to be introduced to R values before I ever made my first trade, great way to flatten out all the variables of time/instrument. I was bored one day (and sick of the scams) and blogged about the basics of it here at TL also -

 

Level the playing field: Measuring results using R Multiples - Traders Laboratory - Professional Traders Community

[BlowFish 10]

Didn't Tewles write about R values in "the future game, who loses, who wins, and why". Years since I read it but that has good coverage on risk essentially covers most the stuff VT does.

 

Worth repeating but RoR is really what you want to be interested in.

 

As an aside personally I like stops based on market structure, vary your size to control your risk.

[gethim 10]

I keep reading about different ways to manage risk. For example, one common rule I read about is to risk no more than 2% of your capital and taking a break after losing 10% per month.

 

Do you guys use a fixed percentage when calculating risk?

 

 

For day trading you need to calculate your average positive day, than your maximum loss per day should be 30% of your average positive day.

 

For swing trading (2-10days), you loss/profit ratio must be 1:10. (if you are trying to make 1$ ,your risk 0.1$). For example SVA 12/10/09 my entrance 7.26 stop loss 7.35 , target 1$ or more, still there. No gaping stocks with potential movement

[sevensa 10]

For day trading you need to calculate your average positive day, than your maximum loss per day should be 30% of your average positive day.

 

For swing trading (2-10days), you loss/profit ratio must be 1:10. (if you are trying to make 1$ ,your risk 0.1$). For example SVA 12/10/09 my entrance 7.26 stop loss 7.35 , target 1$ or more, still there. No gaping stocks with potential movement

 

How do you calculate your average positive day then?

Do you ignore the 30% loss and trade all day to get to your average positive day? And if you do that, is that valid then to calculate 30% of that to stop trading, since your avarege positive day might be completely different if you stop at 30% loss, which will invalidate the average you start with.

 

Why must p/l ratio be 1.10? What is signifcant about that and not 1.05 or 1.20?

[gethim 10]

How do you calculate your average positive day then?

Do you ignore the 30% loss and trade all day to get to your average positive day? And if you do that, is that valid then to calculate 30% of that to stop trading, since your avarege positive day might be completely different if you stop at 30% loss, which will invalidate the average you start with.

 

Why must p/l ratio be 1.10? What is signifcant about that and not 1.05 or 1.20?

 

each trader knows his average day. calculations much easier than you think, I think trading it’s not a mathematics. For example I know that my average day 100 $ net, and I will feel comfortable. I start to trade today from 0 and my stop loss per day 50 $ (I can lose half of average) then I gain 50 $ net my stop loss per day will be 0 $ (because I don't want to lose). if I gain 100 $ net (it's my average so from now I let myself lose only 30% it makes me be more selective) I use this for my intraday trading every day. Few will provide information and strategies for how not to lose money, but it is most important. Your broker will be very glad that you trade all day and bring him a lot of money; no one will carry about you.

 

 

I think good swing it's when you get 1 $ of profit, not for 1k shares but for 10-20K. You can find it only in very clean and cheap stocks. If your entrance point will be ok, You should not lose more then 0.1 $. (It’s all as a target, you can gain 2-4$ but most important not to lose)

 

I do not write that I do not know, for me it works best. all the other nuances are hard to explain

[sevensa 10]

each trader knows his average day. calculations much easier than you think, I think trading it’s not a mathematics. For example I know that my average day 100 $ net, and I will feel comfortable. I start to trade today from 0 and my stop loss per day 50 $ (I can lose half of average) then I gain 50 $ net my stop loss per day will be 0 $ (because I don't want to lose). if I gain 100 $ net (it's my average so from now I let myself lose only 30% it makes me be more selective) I use this for my intraday trading every day. Few will provide information and strategies for how not to lose money, but it is most important. Your broker will be very glad that you trade all day and bring him a lot of money; no one will carry about you.

 

 

I think good swing it's when you get 1 $ of profit, not for 1k shares but for 10-20K. You can find it only in very clean and cheap stocks. If your entrance point will be ok, You should not lose more then 0.1 $. (It’s all as a target, you can gain 2-4$ but most important not to lose)

 

I do not write that I do not know, for me it works best. all the other nuances are hard to explain

 

I know what my average is, but I think you miss my point. Saying that you should stop after 30% of your average is one of those things that sound locigal and easy, but when you actually do it and think about it, it is not that straight forward.

 

What I am asking is, in your example, how did you get to your $100 average? Is that before, or after you stop trading after losing 30% of $100? If this includes the 30% stop rule then this isn't your real average which can be higher or lower.

 

Let me give you an example.

 

Trading day 1:

Profit after trading all day: $80, max draw-down for day $20.

 

Trading day 2:

Profit after trading all day: $120.

However, your first two trades were losers for total of -$50, so if you stopped trading, your profit for the day would be -$50.

 

So, how do you calculate your average to base your %30 on?

($80 + $120)/2 = $100

or

($80 - $50)/2 = $15?

 

I am still not clear why you say that your profit/loss ratio must be 1:10? (btw, I think you mean risk:reward and not profit:loss ratio.) Why would 1:5 not work? Isn't that dependent on your win:loss ratio?

[electroniclocal 10]

We have just started using a tool that analyzes your trading results and can provide mined information from them for you to better make money management decisions.

 

I posted in my blog yesterday on the tool and will be providing updates on how it all goes. If you are interested, come on by. Nothing for sale.

electroniclocal.blogspot.com