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; Originally Posted by Gardan Them sweet dogs are just a facade to make us think he's a nice country boy. ...

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Old Jan 14, 2005, 12:27am   #33
Joined Jul 2003
Originally Posted by Gardan
Them sweet dogs are just a facade to make us think he's a nice country boy. Well it doesn't wash, get the bar Bramble.
GradeEarth, get back on topic or I'll mention Rooney again...
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Old Jan 14, 2005, 12:52am   #34
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Gardan started this thread
Originally Posted by TheBramble
I don't think you misunderstood me Salty. I wont get washed out of the market unless 10 consecutive 9/11s happen and I'm fully into the market on each one.

Let's take a hypothetical example.

Say you have a trading pot of $1M.

I have a max risk of 1% risk per trade and 10% exposure at any one time over all open positions.

Risk is my stop+costs+slippage.

Exposure is what would happen 9/11 - but expectation of being absolutely totalled on the trade rather than just suffering a severe mauling.

Say I've got a nice long setup on a $25 stock with an estimated Risk of 20c (which is pretty typical).

In theory I could trade 50,000 shares (1% of $1M = $10K) / 0.20 (risk) = 50,000 shares. (yep, get that filled in one go - I'll watch )

My exposure would be 50,000 X $25 = $1.25M....oops...I only want to take out 10% of my pot so I downsize. My total exposure on this trade (assuming I want to got full throttle on this one and not have any juice left for other positions) is $100,000 = 4000 shares.

You'd think it would be a lot easier to just go straight to the (total cap X 10%) / stock-price to calculate my position size, but I still always work from my risk side first. Primarily because (a) I don't like anything more than 35c risk and (b) I need to measure my Risk against my target Reward.

Also, if LII is showing bad depth or 'lumpy' strata or the bid/offer spread is wider than it 'should' be...I'll pass.

So yeah, very Risk averse and unlikely to ever be out of the market (again), but at any point in time, I'm sure, my brother and sister traders will be making tons more than me. But they wont be the same brother and sister traders a couple of years down the line...
So why not just put $900k in the bank and gung ho it (so to speak) with the $100k ,risk is the same is it not? And Risk then may be calculated using Stop calc.

Also what if I had 1/2 of my open positions on Buy and half my open positions on sells, would you factor this in to your risk. Or should I also consider that if I had say 5 or 6 open positions (which is well beyond my capabilities but I live in hope) that 5 or six Black Swans may come down simultaneously and land on all my positions.

If one of the Swans lands on my Sell trades would I be quids in?

$60 1000 $60,000 30% Buy
$40 1000 $40,000 20% Buy
$40 1000 $40,000 20% Sell
$30 1000 $30,000 15% Sell
$30 1000 $30,000 15% Sell

$200,000 £100k approx

* £/$ conversion at 1/2 for illustration only

sorry converted the chart on £100k sterling,its late, but you get my drift I hope.

Or Have I lost the Plot???????


Last edited by Gardan; Jan 14, 2005 at 1:39am. Reason: excel prob
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Old Jan 14, 2005, 2:41pm   #35
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Totally understand Tony.

So if you had a US$ 50,000 pot and you decided to trade Google, you would only trade 25 shares based on your rules.
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Old Jan 14, 2005, 2:51pm   #36
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Paul ( Trader 333 ), bearing in mind your previous comments about never allowing your total market exposure to exceed your account balance, do you think that Bramble is overly cautious / super-prudent ?

What it means basically is that under those kind of rules you would need an account balance of US$ 200,000 just to trade 100 shares of Google.
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Old Jan 14, 2005, 3:14pm   #37
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For reference big one day moves (from J Siegel; Stocks for the Long Run 2002) based on Dow Jones for 116 years from 1885 to 2002. A move in one day over 5% occurred 126 times, (63% of them in 1929-33), 46.8% of them were up, 53.2% down. Around 33% of them were associated with news items. The distribution by % move was as follows:

Move of over 20% (22.6%) 1
Between 15% and 20% 0
Between 10% and 15% 6
Between 7.5% and 10% 16
From 5% to 7.5% 103

The daily maximum loss may be extended due to the market closing for an extended period because of physical or political reasons. Examples are break out of WW1, 1930ís bank holiday closing, and the World Trade Centre 9/11 incident.

Also donít forget that some stock markets have disappeared altogether due to revolution and war. I'm not sure if any have been lost or trading disrupted due to natural disasters.
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Old Jan 14, 2005, 6:15pm   #38
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You wouldn't worry too much about a stock suspension and re-entry into the market at a much lower level if you were short.

Do stocks ever come back from suspension at a higher price or do suspensions mainly occur as a result of bad news and cause downward price movements ?

Last edited by Salty Gibbon; Jan 14, 2005 at 6:20pm.
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Old Jan 14, 2005, 8:05pm   #39
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It is total "Account Exposure" that I am concerned with so that if a stock dropped to 0 then I am still able to walk away owing nothing. Personally I dont risk more than 0.4 of 1% of my account on any trade.

When suspended I have only heard of shares opening up lower, maybe someone else can say whether there have been any cases the opposite way round.


You are correct in that if you are Short you would make a killing in these circumstances.

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Old Jan 14, 2005, 10:07pm   #40
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Hi Salty,
There are very frequent cases of suspension and the stock coming back higher. However, they tend to be just prior to an announcement and usually after market close. This messes up the people who trade post market or hold positions after normal close.
My normal maximum loss scenario is well under 1% on each individual trade, but I am sometimes in four simultaneous trades so might have a total exposure of 2% - 3%.
I am not ruled by a bean counting attitude with odd numbers of shares, but trade in round number tranches.
When a trade goes against me I rarely wait for my maximum stop to be hit but exit for a minimum loss at worst and usually scratch or a small profit on the failed trades. This means in effect my actual risk on a trade-to-trade, day-to-day basis is much less than the maximum risk. In other words, the effect of my active position management of open trades mimimises risk further than simple calculation.
Catastrophe event planning, e.g. terrorist attack, needs to be considered and there are easy "insurance" choices such as long deep OTM puts.
For single stock catastrophe events, exposure should be limited to what one can "afford" to lose and should never exceed margin already deposited. Margin deposited should never be the total of liquid funds available.
Over exposure = gambling = inevitable failure.
To be successful in the markets and generate enough consistent profits to make the whole enterprise worthwhile, you MUST comfortably embrace a degree of risk, but that must be acceptable.
The concept that you should trade say, 451 shares of a $22 stock or 296 shares of a $33.52 stock because you think your maximum calculated exposure size should be $9922 is not the approach of a careful risk averse trader, (as I am).
It is the sign of a bean counter mentality which will lead to profits barely amounting to a string of beans.
Mr. Charts
Full time US Share Trader
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