Whats Your Risk Percentage Per Trade?

[asiaforexmentor 10]

Forex Risk Management – Whats your Risk % per trade?

 

Forex Risk Management

FOREX RISK MANAGEMENT

 

Whats your risk % per trade?

Or should i say, what’s your risk appetite?

To be a successful forex trader. You will need to have a proper money management system.

It starts with identifying what level of risk % per trade will you risk.

As a guide, a safe and good risk percentage will be from 1% – 3%.

Anything higher than 3% will be relatively risky.

Why is this so.

If you understand, the forex market can do anything.

Even if you are sure this is the MOST perfect setup.

It MAY NOT end up the way you expected it to be.

Why?

Forex Risk Management – Whats your Risk % per trade?

 

Forex Risk Management

First, you must understand that anything can happen in the forex market.

Just for example, even if it is the most perfect setup. If a major institution pumps in a large sum of money at that period of time. It can change the direction of the market for a short time frame.

And when the retail investors see the market moving in the direction stipulated by the major institution, they will then follow suit and enter the same way.

WHICH causes the movements in the market.

But of course, this doesn’t happen always.

What i’m saying is, anything can happen in the forex market.

So even if you are the best forex trader in the world. You will not have a 100% winning rate as well.

You will still lose as the market can do anything.

Which is why, it is not wise to have a high risk per trade.

Forex Risk Management – For example, if a trader risk 10% per trade.

And a series of unfortunate events happen to him, (maybe it’s a distraction, maybe there’s an earthquake etc)

As a result, he made a series of 5 losing trades.

He would have wipe of 50% +- of his trading capital because he risked 10% per trade.

And with just 50% left, it will be hard for him to make back his loss.

So if you see what i meant.

Forex Risk Management – For example, if you risk 2% per trade.

With a series of 5 losing trades. You would only lose 10%+- of your capital.

Which is not to bad.

With a good trading system, we can easily make back the money loss.

Forex Risk Management – Whats your Risk % per trade?

 

Forex Risk Management

But here comes the big question.

What is your risk appetite?

You see, there is absolutely no point into asking you to risk 1% per trade.

Forex Risk Management – Eg. Capital $5000

Risk of 1% = $50 per trade.

If at the back of your mind, you do feel that $50 per trade is too little.

Then you will most likely find and trade even more trades that you usually should – in order to make more money. Right?

Therefore, the correct way to set your risk % per trade varies with different individuals.

You must ask yourself.

Forex Risk Management – Eg. Will you be satisfied with

$50 per trade or

$100 per trade or

$150 per trade

based on the capital of $5000

Once you got an answer, you got your risk percentage.

Forex Risk Management – Whats your Risk % per trade?

 

Forex Risk Management

Remember,

1) Your risk percentage cannot be too high. As mention a good gauge is 1% – 3%.

2) Your risk percentage must meet your risk appetite. There is no point in risking 1% if you find the amount too little and does not satisfy your hunger.

So there you go.

Once you have set and decided on your risk % per trade.

STICK FIRMLY TO IT!

For example, in a series of trades. You cannot have eg. 1% on 5 trades, then 3% on 5 trades etc.

Because if you play it this way, and what if you make money on the 5 trades with 1% risked, and lose money on the 5 trades with 3% risked. (which usually happens!)

YOU WILL LOSE MONEY!

Therefore, stick firmly to the risk percentage per trade which you have set.

Eg. If you set 2% risk per trade.

From now on, every trade you take – You will risk 2% per trade.

NOTHING MORE, NOTHING LESS.

This way, you will be consistent and you are on the right track to success.

This is part 1 of the 2 series of Forex Risk Management.

Stay tuned for the 2nd part.

 

See you on the other side my friend,

Asia Forex Mentor

Ezekiel Chew

 

Moderated Message:

link removed

Edited October 25, 2011 by TheNegotiator

[TheNegotiator 13]

It's actually quite interesting that most people are aware of money management and the idea of only risking 1-3% of their starting capital, yet they don't try especially hard to incorporate it thoroughly into their trading until they have a bad patch.

 

The suggestion I would have to make is that a new trader should open a small account early on. Learn and formulate a strategy you can then become comfortable with on a good simulator(or at the very least in a live market where the size is extremely small). Once you have a the experience and a strategy, work out what your capital should be based on the strategy. Many do everything the wrong way round. They have some cash saved up as they want to trade, lump it into an account and then start trading. Not such a great plan in many cases if you were to break down the risk they were taking.

[MightyMouse 12]

2% is far to much per trade if you take multiple trades per day. Trading size that coincides with losing 2% or less in a day is far more prudent.

 

However, when you do get a winning trade, it is really nice when the traders you are trading against have a lot of money to lose.

[BlowFish 10]

The important metric is actually the RoR (risk of ruin). Talking about risk as a fixed percent serves no real useful purpose though it can be OK as a 'rule of thumb'. To determine your 'risk appetite' (in any sort of meaningful way) you will need to know your RoR. Quite a naive question coming from a 'mentor'.

[TheNegotiator 13]

Here's the thread for Risk of Ruin for anyone interested:-

 

RoR

[zdo 20]

  Quote

Therefore, the correct way to set your risk % per trade varies with different individuals… You must ask yourself…Will you be satisfied with

$50 per trade or

$100 per trade or

$150 per trade

based on the capital of $5000

Once you got an answer, you got your risk percentage...

 

 

Blowfish is right. RoR is better way to come at it because…

Actually, "The correct way to set your risk % per trade" (and sizing) varies with different systems.

In risk management, most developing traders are no where near ready to access and utilize the type of 'data' coming from “Will you be satisfied with” questions.

At first (and for most, for quite a while) it is much better to establish real stats, then learn how to ask the right questions that will lead to learning how to use those stats properly … which is conservatively (most of the time) ...

[4EverMaAT 10]

  zdo said:

Blowfish is right. RoR is better way to come at it because…

Actually, "The correct way to set your risk % per trade" (and sizing) varies with different systems.

In risk management, most developing traders are no where near ready to access and utilize the type of 'data' coming from “Will you be satisfied with” questions.

At first (and for most, for quite a while) it is much better to establish real stats, then learn how to ask the right questions that will lead to learning how to use those stats properly … which is conservatively (most of the time) ...

 

  BlowFish said:

The important metric is actually the RoR (risk of ruin). Talking about risk as a fixed percent serves no real useful purpose though it can be OK as a 'rule of thumb'. To determine your 'risk appetite' (in any sort of meaningful way) you will need to know your RoR. Quite a naive question coming from a 'mentor'.

 

This is correct actually. Trying to micro-manage each individual trade is self-defeating because you are artifically attempting to limit your risk. You may not be able to predict exactly where market will go, but by placing a basket of trades, you are much more likely to profit or breakeven when market turns around. I have posted a cost averaging spreadsheet here. that does a good job of allowing you to see for yourself.

 

Personally I'd much rather risk 5-20% of my account or more to facilitate doubling it or breaking even on a group of trades vs managing individual trades, which will not push your overall win position enough.

[henryduncan12 10]

Risk management is an important part of forex trading and due to this I put more emphasis on it. It protects trader from big loss. I only go far 1to 3 percent risk per trade.

[TheDude 10]

its no wonder few people are making money with such abstract ideas.

 

the magical 2% that retail traders seem to use as the magic bullet of risk management was in fact taken from portfolio managers who hold a load of positions across multiple asset classes.

 

so, if you're a day trader focusing on 1 market at a time and using 2% (or 1-3%) then you're using the wrong tool for the wrong job. period. if youre trading a portfolio of stocks or futures on a 'buy and hold', maybe not.

 

 

for day trading i'd only advocate using such a low multiple when youre not yet consistently profitable. capital preservation is the #1 point after all. 2% will allow you to stay in the game and live through 1000 cuts until you turn the corner. the only other excuse for using fixed % i'd imagine is when using an automated or mechanical approach where you cant differentiate between good and bad opportunity and treat every signal as an independent event. (i dont know too much about deploying such approaches, so feel free to correct me on this)

 

when youre on top of the game and opportunity presents itself, you dont want to be dipping youre toe in with 2% - you want to be all in. good opportunities are rare. its the height of stupidity to treat all opportunity as equal. in fact, its an admission you dont understand what the market is doing. so why would your risk be the same for all opportunity?

 

however, again, thats just for day trading (imo). its easier for me to understand what the market should be doing in 5 minutes than 5 days

[Trader1 10]

  TheDude said:

its no wonder few people are making money with such abstract ideas.

 

the magical 2% that retail traders seem to use as the magic bullet of risk management was in fact taken from portfolio managers who hold a load of positions across multiple asset classes.

 

so, if you're a day trader focusing on 1 market at a time and using 2% (or 1-3%) then you're using the wrong tool for the wrong job. period. if youre trading a portfolio of stocks or futures on a 'buy and hold', maybe not.

 

 

for day trading i'd only advocate using such a low multiple when youre not yet consistently profitable. capital preservation is the #1 point after all. 2% will allow you to stay in the game and live through 1000 cuts until you turn the corner. the only other excuse for using fixed % i'd imagine is when using an automated or mechanical approach where you cant differentiate between good and bad opportunity and treat every signal as an independent event. (i dont know too much about deploying such approaches, so feel free to correct me on this)

 

when youre on top of the game and opportunity presents itself, you dont want to be dipping youre toe in with 2% - you want to be all in. good opportunities are rare. its the height of stupidity to treat all opportunity as equal. in fact, its an admission you dont understand what the market is doing. so why would your risk be the same for all opportunity?

 

however, again, thats just for day trading (imo). its easier for me to understand what the market should be doing in 5 minutes than 5 days

 

All-in? are you serious? what if you are wrong? your intire acount would be wiped clean

I think thats the dumbest post I ever read:crap::rofl:

[BlueHorseshoe 10]

  TheDude said:

its no wonder few people are making money with such abstract ideas.

 

the magical 2% that retail traders seem to use as the magic bullet of risk management was in fact taken from portfolio managers who hold a load of positions across multiple asset classes.

 

 

 

I was just about to make a post stating this exact same point.

 

The 2% figure is something you'll here over and over again in books like Market Wizards. But those traders are almost invariably trading multiple markets portfolios. The Turtles, for example, used something like a 3% per trade rule, but could hold positions in countless markets concurrently. In fact, they had a seperate rule for total net exposure across their portfolio, which was something like 30%.

 

If you're trading just one market at a time, as most retail traders are, then that market is your entire portfolio. This doesn't necessarily mean that you'll want to risk 30% per trade in that market; portfolios also reduce risk through diversification, where single markets do not.

 

The Dude's advice to go 'all in', however, stretches things a little too far for me!

 

BlueHorseshoe

[BlueHorseshoe 10]

  Trader1 said:

All-in? are you serious? what if you are wrong? your intire acount would be wiped clean

I think thats the dumbest post I ever read:crap::rofl:

 

You'd go all-in if you were 100% certain of something, wouldn't you?

 

What if you were 99% sure of something?

 

I realise that these examples aren't too realistic (though certain forms of pure arbitrage, assuming you can guarantee perfect execution, are pretty much risk free), but the point is this - the more certain you are about the outcome of a position, the more you should risk upon it.

 

BlueHorseshoe

[4EverMaAT 10]

  BlueHorseshoe said:

I was just about to make a post stating this exact same point.

 

The 2% figure is something you'll here over and over again in books like Market Wizards. But those traders are almost invariably trading multiple markets portfolios. The Turtles, for example, used something like a 3% per trade rule, but could hold positions in countless markets concurrently. In fact, they had a seperate rule for total net exposure across their portfolio, which was something like 30%.

 

If you're trading just one market at a time, as most retail traders are, then that market is your entire portfolio. This doesn't necessarily mean that you'll want to risk 30% per trade in that market; portfolios also reduce risk through diversification, where single markets do not.

 

The Dude's advice to go 'all in', however, stretches things a little too far for me!

 

BlueHorseshoe

 

Blue,

 

You are 100% correct in that the oft repeated advice of "only risk x amount per trade" was not intended to micromanage individual trades, but was usually used for a specific strategy which normally traded multiple trading positions. There was an article (cant find it) on a futures blog a while back dealing with how even if you risk 1% per trade, a series of losers can easily set you back 15-30%. So with $10,000 to start, you are down to 8500-7000. The point is that whether you trickle down your losses, or lose

 

Most [usually newer or risk-adverse] traders like this type of advice becase it gives them a false sense of security. They don't like the idea of losing a huge chunk of their funds at once, so the idea of slow steady gains can be matched with slow steady losses sounds beautiful. However this thinking totally ignores the core strategy/overall strategy of profit. It's what i call "monetary escapism", because you don't have to put any real your money where you mouth is. See the next reply below.

 

  Trader1 said:

All-in? are you serious? what if you are wrong? your intire acount would be wiped clean

I think thats the dumbest post I ever read:crap::rofl:

 

  BlueHorseshoe said:

You'd go all-in if you were 100% certain of something, wouldn't you?

 

What if you were 99% sure of something?

 

I realise that these examples aren't too realistic (though certain forms of pure arbitrage, assuming you can guarantee perfect execution, are pretty much risk free), but the point is this - the more certain you are about the outcome of a position, the more you should risk upon it.

 

BlueHorseshoe

 

Exactly. All those people who put all those indicators on their charts to the point that it looks like an airplane cockpit dashboard, with all those "right" parameters, and spend hours/days studying them to identify highly profitable entries and exits, only to bet 0.5%-2% of your account? Does that make sense? If you were so sure you had a winning chance of winning the lottery (80-100%), wouldn't you purchase as many tickets as possible? after all that extensive research, i would certainly hope so. While trading does necessarily require "All-In, everytime" strategy to be profitable, why wouldn't you use 10-40% or more of your account on a basket of trades to reach your profit goals?

 

Poker is similar, except the opponent can fold when you go all in. Trading is much more objective, and the market will almost always "call".

[BlowFish 10]

A bit more on the turtles:-

 

The turtles used a relatively sophisticated (for the time) volatility adjusted position sizing algorithm. i.e. A 'unit size' was determined for the dollar volatility of each market. They then 'pyramided' up to full size in four (if memory serves) steps. There where limits (set in units) for a single market, closely and loosely correlated markets and direction. Each turtle also traded on a notional account size that was determined (and periodically adjusted) for each trader by Rich.

 

The management of trades was really the heart of the turtle system, entries where a simple Donchian breakout. For those interested theres a pdf knocking about on the interwebz that describes it in detail.

[GlassOnion 12]

I am posting this pic for TheDude..... maybe use it as an avatar?

[4EverMaAT 10]

  BlowFish said:

A bit more on the turtles:-

 

The turtles used a relatively sophisticated (for the time) volatility adjusted position sizing algorithm. i.e. A 'unit size' was determined for the dollar volatility of each market. They then 'pyramided' up to full size in four (if memory serves) steps. There where limits (set in units) for a single market, closely and loosely correlated markets and direction. Each turtle also traded on a notional account size that was determined (and periodically adjusted) for each trader by Rich.

 

The management of trades was really the heart of the turtle system, entries where a simple Donchian breakout. For those interested theres a pdf knocking about on the interwebz that describes it in detail.

 

The turtles experiment as I understand it, was to see if traders could be made (vs born with the skill) to trade successfully. I read a pdf about it years ago. One of the original traders gave it away after one of the other original turtles (one of the unsuccessful ones that did NOT follow the system) broke the original pact and started selling some bastardized version of the original Turtle trading system. He felt that if people were going to trade, they should trade the correct one. It goes to show that you could practically give away a system but it is up to the person to implement it correctly.

 

Trade management and money management are virtually synonymous when it comes to systems trading. Position sizing is important when wanting to maximize profitability, not mystical entry points.

[Trader1 10]

IF I was 100% sure I was going to win, wouldn't I buy as many lottery tickets as I possibly could? Yes certanly! I would be pretty stupid if I wouldn't, but guys! trading the market is not lottery, so you can't even use that example, first, the market is allways right, even when you are 100% sure and you are wrong, comon guys lets face it, how many times didn't you think that you where right 100%, you enter the market and it turned out you where wrong? every trade I make I "Think" that there is a great chance the market will go in my direction, otherwice I wouldn't even do the trade in the first place, most of the times I am right, but there is also a percentage of those times Im wrong, isn't it like that? would you do a trade if you didn't think you where 100% right, or atleast close to it? ofcourse not, but as it turns out through probabillity, we can't be right every time, a certain percentage of times we will enter trades in the wrong direction, we will be stopped out etc, there is not one single trader in the world that can do only winners and never have a loosing trade, thats a fact, so what if you where all in one of those times? you would loose most of your intire acount in one single blow, do you know how many good trades you must do to be able to dig your self out of that hole you just made? well lets say you are going to have to struggle a lot! for weeks or months, if you are trading allin you are sooner or later going to blow your acount, THAT is a 100% certanty. the internet is full of people loosing their acounts by believing they where right, it turned out 90% of them was wrong, one big reason is that they don't understand risk and money management or they are trading all in, this isn't Texas Hold'em either btw, by using money management, and allways trading a small percentage of your acount, you are ensuring something like that can never happend to you, it's a disaster and a huge blow mentally which will also affect your trading negative, by using money management you will stay in the game no matter what, protect your capital at all costs, the money are your tools, without them you are finnished as a trader, never think that you are right, or wrong, the market is allways right, all you should do is playing the probabilities.

[Trader1 10]

  BlueHorseshoe said:

You'd go all-in if you were 100% certain of something, wouldn't you?

 

What if you were 99% sure of something?

 

I realise that these examples aren't too realistic (though certain forms of pure arbitrage, assuming you can guarantee perfect execution, are pretty much risk free), but the point is this - the more certain you are about the outcome of a position, the more you should risk upon it.

 

BlueHorseshoe

 

it doesn't matter how certain you are, you could be 100% 99% or 50% certain,

but if the probability says you will be wrong 30%, then you WILL be wrong 30%, period,

you won't know which time you will be wrong, and believe me, you will be wrong when you least expect it, maybe not this time but sometime you will, and if you are all-in that time,

Thank you and congrats former trader, you just blew your acount:) everything you have been building up over all these years trading gone in just one trade, I wouldn't want to put my self in that situation. I think I would kill my self:haha:

[4EverMaAT 10]

  Trader1 said:

it doesn't matter how certain you are, you could be 100% 99% or 50% certain,

but if the probability says you will be wrong 30%, then you WILL be wrong 30%, period,

you won't know which time you will be wrong, and believe me, you will be wrong when you least expect it, maybe not this time but sometime you will, and if you are all-in that time,

Thank you and congrats former trader, you just blew your acount:) everything you have been building up over all these years trading gone in just one trade, I wouldn't want to put my self in that situation. I think I would kill my self:haha:

 

No one said there would NOT be risks, but assigning preferences to how you manage the risk does not change the risk. Neither do the emotions. I would stop defending these fears and face them. You can't overcome fears conceptually (you can't solve the problem at the level of the problem). You take action, look honestly at the results, make adjustments if necessary, and do your best. Either that or take the chips off the table; then you are guaranteed to not lose anything.

[BlueHorseshoe 10]

  BlowFish said:

A bit more on the turtles:-

 

The turtles used a relatively sophisticated (for the time) volatility adjusted position sizing algorithm. i.e. A 'unit size' was determined for the dollar volatility of each market. They then 'pyramided' up to full size in four (if memory serves) steps. There where limits (set in units) for a single market, closely and loosely correlated markets and direction. Each turtle also traded on a notional account size that was determined (and periodically adjusted) for each trader by Rich.

 

The management of trades was really the heart of the turtle system, entries where a simple Donchian breakout. For those interested theres a pdf knocking about on the interwebz that describes it in detail.

 

There are also several good books - Curtis Faith's and Michael Covel's. I don't want to get into debates about what a poor manager Faith was after the Turtles experiment ended, or what a slithering little turd of a fraud Covel may or may not be; if you want a thorough outline of how the Turtles traded then either book does a decent job.

 

As for the pyramiding, if my memory is correct then this was combined with the trailing of a stop-loss on prior entries, so that the earliest units became risk free by the time later ones were added.

 

BlueHorseshoe.

[BlueHorseshoe 10]

  Trader1 said:

it doesn't matter how certain you are, you could be 100% 99% or 50% certain,

but if the probability says you will be wrong 30%, then you WILL be wrong 30%, period,

you won't know which time you will be wrong, and believe me, you will be wrong when you least expect it, maybe not this time but sometime you will, and if you are all-in that time,

Thank you and congrats former trader, you just blew your acount:) everything you have been building up over all these years trading gone in just one trade, I wouldn't want to put my self in that situation. I think I would kill my self:haha:

 

Hi,

 

Just to be clear, I wasn't recommending going 'all-in' - I was just using an extreme example to try and argue a point.

 

My basic point was that the 2% risk per trade rule has been abstracted from traders who typically hold simultaneous positions in multiple markets, and who therefore often have a greater net risk to their equity than 2%. Trying to apply this rule to the trading of one market is misguided.

 

Risk management is a personal thing anyway, so you are quite right to say 'I wouldn't want to put myself in that situation'. You should trade within your comfortable limits, as should we all.

 

BlueHorseshoe

[BlueHorseshoe 10]

  GlassOnion said:

I am posting this pic for TheDude..... maybe use it as an avatar?

 

Yep - that guy's definitely "all-in" !!!

[bj139 10]

Quote:

"IF I was 100% sure I was going to win, wouldn't I buy as many lottery tickets as I possibly could? Yes certanly!"

 

If you bought many lottery tickets with the same numbers the government would deny you your winnings since they would suspect you of cheating. Remember Livermore's coffee trade in Reminisciences of a Stock Operator.

[SunTrader 10]

  4EverMaAT said:

Poker is similar, except the opponent can fold when you go all in. Trading is much more objective, and the market will almost always "call".

Similar yes but not the same.

 

Unless .......... you go "all-in" then it is win or (blow your account) go home.

 

But for anyone to say that a routine 2-3% risk should adjusted to 10 or 20 times that amount because the probabilitites suggest so just doesn't understand what a career in trading entails.I understand one size doesn't fill all but seriously folks.

 

A doubling of a 5% risk to 10% is reasonable or something along those lines but going from single digits to 30, 40, 50% is playing with fire.

[Trader1 10]

  SunTrader said:

Similar yes but not the same.

 

Unless .......... you go "all-in" then it is win or (blow your account) go home.

 

But for anyone to say that a routine 2-3% risk should adjusted to 10 or 20 times that amount because the probabilitites suggest so just doesn't understand what a career in trading entails.I understand one size doesn't fill all but seriously folks.

 

A doubling of a 5% risk to 10% is reasonable or something along those lines but going from single digits to 30, 40, 50% is playing with fire.

 

Definitely! I made a lot of backtest experimenting with how much I could risk and get away with it, 4% was the highest I could go, anything higher would blow the acount, it's hard to say how much you can risk for any given method, I believe it is a very individual number and how good your system is and how good you are as a trader, with some trading methods you could possible risk more or less depending on profitability, win ratio, risk to reward etc, there is so many factors playing,