Why only 1% Capital Risk when trading

This is a discussion on Why only 1% Capital Risk when trading within the Psychology, Risk & Money Management forums, part of the Methods category; Gridiron, your assumption that 1% (or less) of capital risked per trade is quite correct - not the full trade ...

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Old Jan 13, 2005, 12:41am   #17
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Gridiron, your assumption that 1% (or less) of capital risked per trade is quite correct - not the full trade size - just the risk portion.

But Paul's point - absolutely valid- is what is known as a Black Swan event. An event so rare that few factor it's possibility onto their trading plan. And one, when it does happen, often wipe's out the unwary.

There have been systems which suggest taking a position size of no more than $25K, but I would suggest you consider this in relation to your planned operating capital.

By that I mean, if you have a trading capital base of $1M then taking on a position size of $100K (i.e. 10%) would be acceptable (IMV) providing your risk ALWAYS remained within the 1% range.

You will most often find that your capital base will be many times more than you need on a risk basis to balance your risk profile on an outright exposure basis.
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Old Jan 13, 2005, 1:05am   #18
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Thanks Brumble

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Quote:
Originally Posted by TheBramble
Gridiron, your assumption that 1% (or less) of capital risked per trade is quite correct - not the full trade size - just the risk portion.
By the risk portion you mean, what your stop is, might be?

[QUOTE
But Paul's point - absolutely valid- is what is known as a Black Swan event. An event so rare that few factor it's possibility onto their trading plan. And one, when it does happen, often wipe's out the unwary..[/QUOTE

Are there any other events I should be aware of that might have this devastating affect on a share.If the answer is to long, just say so and I will get your drift.

Even with a stop in place, what affect did 911 have on shares for instance. Did everyone suffer massive slippage?



Cheers Gaducks
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Old Jan 13, 2005, 1:29am   #19
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Quote:
Originally Posted by Gardan
By the risk portion you mean, what your stop is, might be?
Yes.

Quote:
Originally Posted by Gardan
Even with a stop in place, what affect did 911 have on shares for instance. Did everyone suffer massive slippage?
Don't know. I wasn't in the market at that time...if it hadn't been 9/11 it would have been something else...

The point is, you can plan your trading on never having a 9/11 and make mega bucks until it does occur - or factor the possibility of a 9/11 into your trading plan.

The first approach will have you exceeding all your contemporaries' performance - the second will have you staying in the game.... your choice.

BTW Rooney is CRAP...
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Old Jan 13, 2005, 6:29am   #20
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Originally Posted by Trader333
Garden,
I cannot remember the exact details of the stock name but one of the persons concerned had bought 2000 shares of a stock that was valued at $60 (ish) so having an exposure of $120K with an account of only $30K.

The stock was then suspended from trading and when it opened up again it was trading at around $10. This meant that the loss on the trade was immediately (2000 x $60) - (2000 x $10) = 100K. Taking off the $30K account in margin, this person became liable for $70K and they had to sell their house to cover this.

Paul
Just another excuse to trade Forex!

James
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Old Jan 13, 2005, 9:28am   #21
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Gardan started this thread
Quote:
Originally Posted by TheBramble
Yes.

Don't know. I wasn't in the market at that time...if it hadn't been 9/11 it would have been something else...

The point is, you can plan your trading on never having a 9/11 and make mega bucks until it does occur - or factor the possibility of a 9/11 into your trading plan.

The first approach will have you exceeding all your contemporaries' performance - the second will have you staying in the game.... your choice.

BTW Rooney is CRAP...
So is it prudent to factor in say a possible 20% (911) hit on all your open positions or more?
Is anything over 50% getting to the " Time to get in the coal bunker stage"

Re: Rooney, as a Liverpool fan , when we kick are Mancunian Neighbours ar*s'es off the field on Saturday, I hope Fergie plays him in the same position he played last night.
But Please,Please, lets keep to this very important subject.
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Old Jan 13, 2005, 12:51pm   #22
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Quote:
Originally Posted by Gardan
So is it prudent to factor in say a possible 20% (911) hit on all your open positions or more?
Is anything over 50% getting to the " Time to get in the coal bunker stage".
Gradeon, look at it like this.

How many positions would you need to have open at any one time, for a flock of Black Swans to sail into view (as per $60 to $10 example given above) for you to wish your exposure had been lower?

I'm not trying to be deep, but everyone's risk profile and comfort level is different. I never have more than 10% in the market at any one time and my risk per trade is normally WAY less than 1% which is my absolute MAX.

I consider I am VERY risk averse. But I didn't start that way...
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Old Jan 13, 2005, 1:46pm   #23
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Quote:
Just another excuse to trade Forex!
Quite possibly but I dont like trading markets where I have no way of measuring volume.


Paul
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Old Jan 13, 2005, 5:23pm   #24
 
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Is the risk any less with things like QQQQ and SPY ?
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