Capital Per Trade or Lot Size!

[Paladin 10]

Hello, to everyone!

 

I have a pretty simple question, but still. What amount of capital should I use per one trade.

 

What lot size to pick. It is so interesting to invest all you deposit when you are 100% sure you will win.

[SIUYA 11]

you may be100% sure you will win, but the market will make 100% sure that you will loose over the long run.

 

If you want a good source of money management ideas. Try www. breakoutfutures .com

There is plenty of info already here on TL also answering your question

[cashonly 10]

Look at the worst case scenario if that particular trade went against you. How much could you lose while sticking to your trading plan and without your emotions kicking in to cut your losses earlier than your plan dictates?

 

Work backward from there in terms of price of stock, trade size, entry/exit points. Use entry & exit points that make sense to THE MARKET, not to you. Just saying, I'm using a $1 stop because that's all you want to do is the wrong approach. Look at things the market is looking at... whole numbers, MA support, 52 wk hi/lo, prior day hi/lo, etc.... for your exit / entry points. Then, determine the amount you would be willing to lose in the worse case loss scenario. If it gives you a trade size so small as not worthy of trading (ie: in the extreme, think BRK.A), then move on to a different instrument.

 

No matter how good the plan and strategy, if you're not comfortable with the loss you'd incur on a trade, and things get ugly, you're not gonna stick to your plan and that's as bad as trading with no plan at all.

[Oldwolf 10]

I would say that 10% of account is max lot size you can trade with. In casual trading it is much more less.

[zeke 10]

i say start with the minimum amount !! as you start winning then increase slowly !

[BlowFish 10]

If you have positive expectancy trade small enough that the law of large numbers works for you. If you don't have positive expectancy go all in before the law of large numbers works against you. If you are 100% sure you will win go all in using the most highly leveraged instrument you can find, borrow money against your house, from your family, sell a kidney.

 

Alternatively learn how to calculate risk of ruin (RoR), then you will be able to decide for yourself with some confidence.

[mathew.luk 10]

It depends, for me it is about 2-5% of my capital.

 

I think it really depends how much you are willing risk/lose for each "chance" to win. For me I just see each trade as a probability to win, but never as 100%. You can always improve your probability of each trade by looking for techniques/setup that historically or statistically yield higher returns.

 

However, no matter how good I think my chances are with a trade, I always keep in the back of the mind whatever I trade might next day have a chance to big go against me in a really bad way so I never take a massive position. It is really back to the basic, the trade off between return and risk.

 

As to investing everything in one trade that you are 100% sure of, well I used to do it when I started trading stocks with about 5k. I didn't really had any option but to be aggressive. Once I build up my capital, I don't use that money management approach anymore.

 

And if you can find these 100% sure opportunities consistently over time, sure. Otherwise this "all in" approach is more likely to do you more damage than good in the long run.

[TraderWill 11]

Your starting capital will depend on how well your methodology performs. For example, if you have a system that gives you about 65% win rate then statistically you have a very high probability of getting three losing trades in a row. You also have about a 1% probability that you'll get ten losing trades in a row. A 1% probability is very low but if you trade 200+ days each year it will probably happen to you once or twice during the year.

 

It's usually best to plan for the worst case. You know Murphy's Law will kick in at the worst possible moment, right? Now the question is how big of a hit to your account do you think you can handle financially and mentally. Can you live with a 10% hit? A 20% hit? If your system has 65% winners you know you'll recover either way. In the case of a 10% drawdown you'll need to make back 11%, with a 20% drawdown you'll need to make back 25% to get to your previous equity high.

 

Let's assume that you can deal with a 20% drawdown. That means that the 10 losing trades in a row add up to 20% of your account, so on average the maximum risk you want to take on any single trade is 2% (10 X 2% = 20%). It's actually a bit more complicated than that but this simple calculation gets you close. Similarly if you think that you can only be comfortable with a 10% maximum drawdown then you should risk no more than 1% of your account on any single trade.

 

That was a long way of saying that I agree with the earlier post that you should risk no more than 1% to 2% of your trading capital on each trade.

 

From that you can back into the size of account that you need. If your system's method has average losing trades of 20 pips and you're trading a single mini lot, then your account size X 1% has to equal $20. So a $2000 acount would be your minimum size, $2,000 X 1% = $20. If you want to be even more conservative use the size of your largest losing trade instead of average losing trade.

 

Good luck in your trading.

[MightyMouse 12]

Hello, to everyone!

 

I have a pretty simple question, but still. What amount of capital should I use per one trade.

 

What lot size to pick. It is so interesting to invest all you deposit when you are 100% sure you will win.

 

Paladin,

 

It's a fantasy to know what your expectancy is before the trade. So you should treat every trade as if it's more likely to be a loser than a winner. In which case you want to lose as little as possible on each trade.

 

Then, it is going to depend on the type of trading and the instrument that you are going to trade.

 

I trade CL and GC mostly and I risk about .2% per trade. So 5 bad trades in a row and I am down 1% plus the vig. I take lots of small losers and anywhere from small winners to very large winners. Small losers allow me to not think twice about taking the next trade or the next or the next.

 

I trade mostly intra-day too, but i would design it the same way if I were to go back to short term or swing trading.

 

So, if I were starting with a $10,000 account, a .2% stop would be 20 dollars. There isn't too much that you can trade other than stock that will work with that risk level. Something like losing a dollar on 20 shares of a $10 dollar stock. It probably sounds ridicules, but it works. If it goes up, you can start adding to it. But, each time you lose, you will be happy it was only 20 bucks.

 

You could trade a futures contract and give it 2 ticks or so, but you are going to have to become comfortable with taking a whole lot of losers waiting for that winner and when that winner comes, then you need to be able to pounce. Small losers and small winners is not a good combination. If you can't learn to take the big winners, you'll ruin your account and your psyche.

 

Trading is easy, but it can be really difficult if you learn to trade from someone who doesn't know what they are talking about.

 

MM

[zdo 20]

it’s system(s) dependent … that's my broken record answer for 'every' question.

Some types of systems must accept wider stop loss per entry, etc

Some types of systems must tolerate deep(er) drawdowns than others, etc.

 

The ‘mode’ for the universe of systems is clustered around 70% optimal-f. But it needs to be dialed in for each system because some types of systems can go much higher / closer to opt-f, etc.

ie when testing 70% optimal f is a good place for your first ‘seed guess’ …

[SIUYA 11]

zdo - i laugh when you say that as you are correct - its system dependent.

I always imagine a fish asking a human - so how do I breathe?

Dont ask me why this pops in my head.....maybe its an old larson cartoon.

[emazing 10]

Hi Paladin,

I am a VERY experienced day trader and most of my trades ARE winners. I happen to work for a large hedgefund, but even with all my experience, I only enter about 10% of my buying power.

 

So for example, if your buying power is $1-million, you should NEVER enter a position using more than $100k (for example, 1000-share lots of BIDU would be resonable).

 

As for being sure that you will win 100%, be careful my friend! I've lost alot of money when I started to day trade. I was many times 100% sure, entered a trade just to lose. You can NEVER EVER be 100%

sure, EVER!! Be careful and always give the market the respect it deserves.

 

Also, try not to overtrade. I only trade for an hour a day, that's it! at 11 am I shut down my computer and go on with my life.

 

Good luck to you,

 

emazing

[thalestrader 14]

"The rules of conduct, the maxims of action, and the tactical instincts that serve to gain small victories may always be expanded into the winning of great ones with suitable opportunity; because in human affairs the sources of success are ever to be found in the fountains of quick resolve and swift stroke; and it seems to be a law inflexible and inexorable that he who will not risk cannot win." John Paul Jones, letter to Vice Admiral Kersaint

 

 

 

Look at the similarity between what John Paul Jones says above and Blowfish's post #6 in this thread. If you can recognize the common themes, and then if you take Blowfish's advice and learn how to calculate risk of ruin, you will likely find that the answer to the question of what the appropriate percent of capital to risk risk per trade will be a good bit higher than MightyMouse's .2% but far far less than "all you deposit."

 

As John Paul Jones said, risk nothing and you cannot win. Likewise, if you risk it all and lose, you likewise cannot win. Risk the right amount, however, and your small victories should each be greater than your smaller losses, and occasionally a small victory will run into a great one.

 

Risk too much, you will be ruined. Risk too little, and your small victories will never have the opportunity to expand into the occasional (and necessary) great ones. Risk the right amount and trade with discipline, and you will be succeed beyond that which most believe possible.

 

 

 

Best Wishes,

 

Thales

Edited January 30, 2011 by thalestrader

[MightyMouse 12]

"The rules of conduct, the maxims of action, and the tactical instincts that serve to gain small victories may always be expanded into the winning of great ones with suitable opportunity; because in human affairs the sources of success are ever to be found in the fountains of quick resolve and swift stroke; and it seems to be a law inflexible and inexorable that he who will not risk cannot win." John Paul Jones, letter to Vice Admiral Kersaint

 

 

 

Look at the similarity between what John Paul Jones says above and Blowfish's post #6 in this thread. If you can recognize the common themes, and then if you take Blowfish's advice and learn how to calculate risk of ruin, you will likely find that the answer to the question of what the appropriate percent of capital to risk risk per trade will be a good bit higher than MightyMouse's .2% but far far less than "all you deposit."

 

As John Paul Jones said, risk nothing and you cannot win. Likewise, if you risk it all and lose, you likewise cannot win. Risk the right amount, however, and your small victories should each be greater than your smaller losses, and occasionally a small victory will run into a great one.

 

Risk too much, you will be ruined. Risk too little, and your small victories will never have the opportunity to expand into the occasional (and necessary) great ones. Risk the right amount and trade with discipline, and you will be succeed beyond that which most believe possible.

 

 

 

Best Wishes,

 

Thales

 

Theory versus practice. when you lose, any amount is too much. A smaller amount is better than a small amount. I lose more trades than I win so smaller is better.

[thalestrader 14]

Theory versus practice. when you lose, any amount is too much. A smaller amount is better than a small amount. I lose more trades than I win so smaller is better.

 

In both theory and in practice, losing more trades than you win is only a problem if your losses are the same size as or greater than you wins. I would assume that for the discussion to make sense at all we were talking about a system whereby profits exceeded losses on a net basis even if losses exceed wins on a percent of opportunity basis. Of course, if your system is a net loser, then, by all means, lose it as slowly as you'd like, right MM?

 

By the way, have you given any more thought to the little trading contest you suggested back in The Race thread? I'd like to hear how you'd like to structure it if you are still interested.

 

Best Wishes,

 

Thales

[MightyMouse 12]

In both theory and in practice, losing more trades than you win is only a problem if your losses are the same size as or greater than you wins. I would assume that for the discussion to make sense at all we were talking about a system whereby profits exceeded losses on a net basis even if losses exceed wins on a percent of opportunity basis. Of course, if your system is a net loser, then, by all means, lose it as slowly as you'd like, right MM?

 

By the way, have you given any more thought to the little trading contest you suggested back in The Race thread? I'd like to hear how you'd like to structure it if you are still interested.

 

Best Wishes,

 

Thales

 

Yes, Thales. Its about the almighty dollar and not the percent winners vs losers of trades. I also indicated to Paladin that using the stop that I do, you also need to be able to pounce when it moves in your favor. In addition, you also have to be able to get in in again once you get stopped out at possibly a worse price. So, out of context, a minuscule stop like I use may not seem reasonable if you don't recognize all the other variables to using it. I assumed that since he was even asking the question that he was very new and losing as little as possible seemed like good advice from a practical perspective, since his potential for blowing an account is near 100%.

 

As far as the contest, I can do it now, but in a few months I may be permanently taking on additional responsibilities which come with both a large capital outlay and a larger amount of debt. If I do that, then it would be a mistake to spend a day in front of a screen. So, if I begin, I may not be able to finish if I end up acquiring that business.

 

MM

[Vincent Vega 10]

Hello, to everyone!

 

I have a pretty simple question, but still. What amount of capital should I use per one trade.

 

What lot size to pick. It is so interesting to invest all you deposit when you are 100% sure you will win.

The Kelly criterion is a formula used to determine the optimal size of a series of bets...

 

Money Management Using the Kelly Criterion

 

Equity Curve Random Generator <--- here don't lie :bang head:

 

it's just a model, give it a try

 

:ciao:

[thalestrader 14]

...As far as the contest, I can do it now, but in a few months I may be permanently taking on additional responsibilities which come with both a large capital outlay and a larger amount of debt. If I do that, then it would be a mistake to spend a day in front of a screen. So, if I begin, I may not be able to finish if I end up acquiring that business.

 

MM

 

No problem, MM, I understand completely. As it is, if we were to commence a contest, my trading will be mostly swing/position trades rather than day trades as my non-trading responsibilities remain at a level that preclude me from day trading regularly.

 

How do you propose to structure the contest? Perhaps, if you and any other interested parties would be amenable to it, MadMarketScientist would like to get involved and make it an official TL event.

 

Best Wishes,

 

Thales

[MightyMouse 12]

No problem, MM, I understand completely. As it is, if we were to commence a contest, my trading will be mostly swing/position trades rather than day trades as my non-trading responsibilities remain at a level that preclude me from day trading regularly.

 

How do you propose to structure the contest? Perhaps, if you and any other interested parties would be amenable to it, MadMarketScientist would like to get involved and make it an official TL event.

 

Best Wishes,

 

Thales

 

Sure, If MMS would be willing to do the math and make it an official TL event, then that would be great.

 

 

MM

[MightyMouse 12]

No problem, MM, I understand completely. As it is, if we were to commence a contest, my trading will be mostly swing/position trades rather than day trades as my non-trading responsibilities remain at a level that preclude me from day trading regularly.

 

How do you propose to structure the contest? Perhaps, if you and any other interested parties would be amenable to it, MadMarketScientist would like to get involved and make it an official TL event.

 

Best Wishes,

 

Thales

 

Thales,

 

When I thought about it last time, I thought it might make sense if we all had a common broker and we gave them permission to audit the accounts and post the results and offer a prize. You have to figure that they would love to have a bunch of cowboys trying to achieve riches while they get paid commissions. But, if we are not going to be trading the same type of instruments, then it limits the number of brokers we can use to only a few that broker all types of instruments.

 

MM

[thalestrader 14]

Thales,

 

When I thought about it last time, I thought it might make sense if we all had a common broker and we gave them permission to audit the accounts and post the results and offer a prize. You have to figure that they would love to have a bunch of cowboys trying to achieve riches while they get paid commissions. But, if we are not going to be trading the same type of instruments, then it limits the number of brokers we can use to only a few that broker all types of instruments.

 

MM

 

I have been wanting to give openecry a try for futures, as their all-in commission price is extremely competitive and I like what I have seen of the data flowing through the OEC Trader Demo. If I'm not mistaken, OEC now allows for trading futures, equities, and forex through one account (you have to fill out the forms for the markets you wish to trade - so if you wish to trade all three, you need to fill three apps). Of course, my interest in OEC is to trade futures only, so I may be mistaken. I know Brownie and a good number of other TL regulars use OEC and have been happy with them. I was intending to fund a 20-25k account with OEC in the near future. Would you be amenable to OEC? If so, I'll send a PM to MMS and to Brownie and we can see if we can get them interested in auditing accounts and providing weekly updates to a thread here at TL.

 

Best Wishes,

 

Thales