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 Trader333 Garden, You are touching on the subject of pair trading which is used to offset market ...

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Old Jan 15, 2005, 5:25pm   #61
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Originally Posted by Trader333
Garden,

You are touching on the subject of pair trading which is used to offset market movements either up or down and is an interesting subject in its on right. However, this does not cater for the unexpected suspension of a stock from trading although it can be used as a means to offset sudden movements in an index such as the Dow.


Paul
TheBramble or The TheBramble has started a thread on disaster planning, which if he has not started it to stop me beating him in the T2W awards next year. I think links in quite nicely with this thread.


http://www.trade2win.com/boards/trading-systems/13310-disaster-planning.html
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Old Jan 16, 2005, 1:01pm   #62
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Originally Posted by Mr. Charts
Gary,
Just to clarify my post 42 if I have not made myself clear - IMHO the best person to ask about options is Roger M.
I regard him as being not only a better options player than I am but know that anything he says will be spot on and well expressed and imho will be of maximum benefit to readers.
Since I do not actively trade options I simply do not think it is appropriate for me to expound on the subject, so I won't.
Richard
Thanks Mr C, Who is Roger M, it's not the Saint is it? I met him once skiing, a few years back, in a small Hamlet in Switzerland called Villars, he has a pad there.

I never spoke to him about trading but he didn't seem the type of bloke who might be interested in the markets?

Never can judge a book by it's cover hey!

Gary
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Old Jan 16, 2005, 1:45pm   #63
 
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Hi Gary,
Privmail him. He is also the options forum editor.
You can rely on anything he says as being correct , factual and practical - not the guesswork, supposition, speculation, or comments that "sound" right and convincing on BBs, but are recognised by the competent and experienced as being just plain tosh.
He'll turn red when he reads this :-)
Richard
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Old Jan 16, 2005, 3:56pm   #64
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Richard, Socrates is on vacation for a couple of weeks as you well know and I find it a little childish for you to pillory him when you know he can't defend himself.
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Old Jan 16, 2005, 4:19pm   #65
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Originally Posted by Gardan
Bramble, you mentioned you have lost your shirt (and obviously bounced back-respect) whilst doing your 8/10 years apprenticeship. Was any of these losses due to the unusual events we have discussed. Or more to do with an aggressive trading strategy.
As stated elsewhere Gardock, I managed to create my own personal 9/11 on a couple of occasions. The first couple of forays into trading were doomed by under-capitalisation, lack of basic skills and knowledge an a complete absence of and Risk or Money Management.

Ignored stops, let losses run - normal sort of stuff.

Aggressive? Yes, but not by design. In hindsight it was simple stupidity.
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Old Jan 16, 2005, 5:22pm   #66
 
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Hmmm

I seem to be losing the thread of this thread.

Is Roger M = Socrates then or have I missed something ?

Bloody weird website this is at times.
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Old Jan 16, 2005, 6:16pm   #67
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Originally Posted by Salty Gibbon
Hmmm

I seem to be losing the thread of this thread.

Is Roger M = Socrates then or have I missed something ?

Bloody weird website this is at times.
Dunno Salty, I just tink, your mad. It's better than corrie though!

Guess he ain't the "Saint" then?
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Old Jan 16, 2005, 6:22pm   #68
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typo

Gardan started this thread PLEASE, PLEASE,PLEASE, Lets not kill yet another thread with a multi nick's saga.

I getting to the point where I don't give "Two Flying Swans" on this subject.

Last edited by Gardan; Jan 17, 2005 at 8:03am. Reason: Lets stay with the program, please
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Old Jan 16, 2005, 6:46pm   #69
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D'Brumles

Gardan started this thread
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Originally Posted by TheBramble
As stated elsewhere Gardock, I managed to create my own personal 9/11 on a couple of occasions. The first couple of forays into trading were doomed by under-capitalisation, lack of basic skills and knowledge an a complete absence of and Risk or Money Management.

Ignored stops, let losses run - normal sort of stuff.

Aggressive? Yes, but not by design. In hindsight it was simple stupidity.
Tony, Re the under-capitalisation bit, is it fair to say that as a trader builds up his pot of lolly. He/She may have to take a few more risks with there capital (not with there stops). Say, risking 5% -10% in the market, until the pot is large enough to use your more prudent risk management?
If not how will the trader survive trading prudent small amounts, without getting nailed by all the fees.

I'm guessing the answer may be :
Start with a big pot or take bigger chances and hope nothing bad happens reducing your risk along they way?

What's the biggest killer of Traders, that make up the stats of 95% failure (even if it is not that, probably fair to say it is high).

Not using Stops?-under-capitalisation- ect. ect.

Gary

Last edited by Gardan; Jan 16, 2005 at 7:03pm. Reason: typo
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Old Jan 16, 2005, 7:37pm   #70
 
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Bimble,
your #64 has me wondering if a post got pulled, or you were being typically cheeky in supposedly assuming that Richard's previous comment automatically identified a fellow poster.
(Hmm, think I nailed that one...)
On risk, sizing, etc - there is no requirement to size a position on the supposition that all holdings will zero on catastrophe, provided you either have a reasonably diverse spread of holdings or you only have part of the total pot in the market at any one time. If you had 20,000 in your pot, and put all 20k into 5 stocks from the same sector of the Nasdaq (for example) then your risk is significantly higher than if you had 10 holdings of 2K each, spread over the FTSE, DAX, CAC, NYSE and NASDAQ in different industries/sectors.

The bigger your pot, the smaller the return needed to accomodate a nice lifestyle - although it's a bit harder to buy $1 Bn in most companies due to the pressures of suddenly becoming CEO of Microsoft etc. Personally (and no doubt wrongly) I do this sort of thing by 'feel' - I make sure that if everything zeroes I can afford to pay the bill for any margin incurred - when buying shares/shorting shares the worst that happens is I lose what I invested (long) or have to pay out the price of the price drop (short) - it would be a once in a millenium event, if you had ten holdings, for more than a couple to do this at once - a general market collapse like 9/11 will perhaps halve everything - you should, IMO, as a matter of course, assume something like 'all share prices halve faster than I can react' as the worst case scenario, and invest on that basis.

To invest on the idea of 'all prices zero' is too cautious - if that happened then money will cease to have value anyway, as nobody will be in business any more.

For Grandiron, who maybe didn't experience 9/11 as a trader, and has hopefully not been holding long when a company posts an earnings surprise of the wrong flavour, you need to always bear in mind that companies can and do drop by 30-50% on profit warnings, and it's blue chips doing it sometimes, so personally I'd say you should always limit exposure to the extent that you MAY have at least a couple do it simultaneously - so you don't want to have to answer margin calls at that point that require you sell the house.

Dave
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Old Jan 16, 2005, 7:41pm   #71
 
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Oh, I should perhaps also note that I tend to agree with Theresa Lo, who opined (I misquote dreadfulyl here) that the 1% or 2% rule is too tight - she suggests 5%, on the grounds that if you are wrong 20 times in succession then you probably ought to rethink your strategy. More cash in the pot returns more income for less risk, so I'd tend towards conservatism the richer I got... I'll let you know if I do when I manage it <g>
Dave
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Old Jan 16, 2005, 8:14pm   #72
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Originally Posted by DaveJB
To invest on the idea of 'all prices zero' is too cautious - if that happened then money will cease to have value anyway, as nobody will be in business any more.

For Grandiron, who maybe didn't experience 9/11 as a trader, and has hopefully not been holding long when a company posts an earnings surprise of the wrong flavour, you need to always bear in mind that companies can and do drop by 30-50% on profit warnings, and it's blue chips doing it sometimes, so personally I'd say you should always limit exposure to the extent that you MAY have at least a couple do it simultaneously - so you don't want to have to answer margin calls at that point that require you sell the house.

Dave
Dave, interesting points, look forward to a few views on the points you have raised.
Re: 911& profits warnings no to both but this thread has certainly made me aware of them.

Re sell my house, I dont have one, the wife just lets me sleep here and help with the bills.

Gary, (I think??)
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Old Jan 16, 2005, 8:43pm   #73
 
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Quote:
you should, IMO, as a matter of course, assume something like 'all share prices halve faster than I can react' as the worst case scenario, and invest on that basis.

To invest on the idea of 'all prices zero' is too cautious - if that happened then money will cease to have value anyway, as nobody will be in business any more.
Tend to agree with this.

A sensible and prudent middle ground.
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Old Jan 16, 2005, 10:24pm   #74
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Originally Posted by Gardan
Tony, Re the under-capitalisation bit, is it fair to say that as a trader builds up his pot of lolly. He/She may have to take a few more risks with there capital (not with there stops). Say, risking 5% -10% in the market, until the pot is large enough to use your more prudent risk management?
If not how will the trader survive trading prudent small amounts, without getting nailed by all the fees.

I'm guessing the answer may be :
Start with a big pot or take bigger chances and hope nothing bad happens reducing your risk along they way?
Yes and No.

If you're starting with a liquid assets base which doesn't allow that level of caution, yes of course, you'll have to be be hitting a much higher percentage. But then again, there's a difference between trading successfully small with a small capital base - and trading wildly with a small capital base because you need the income.

The transition from paper trading to cash trading should IMHO be with a very small position size. So small, that costs barely allow you to B/E. That way, you get used to the real world of slippage and bad fills and real market action. Stuff that NEVER happens when you're paper trading.


Quote:
Originally Posted by Gardan
What's the biggest killer of Traders, that make up the stats of 95% failure (even if it is not that, probably fair to say it is high).

Not using Stops?-under-capitalisation- ect. ect.
I don't know if that figure is high or not. But I suspect running losses, cutting profits, expectation/hope, too early/late, assumptions, no risk or money management and trading too much of the pot. This has been covered to death elsewhere, but bears repeating I guess.
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Old Jan 16, 2005, 10:34pm   #75
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Originally Posted by DaveJB
To invest on the idea of 'all prices zero' is too cautious - if that happened then money will cease to have value anyway, as nobody will be in business any more.
It's interesting that your comment and Salty's comments have got me thinking about my disaster strategy.

I am a probability type. Love the stuff. I KNOW my position is never going to hit zero. (Or rather, the probability is so low as to not be worth thinking about). I have a really good 'feel' for roughly how things are likely to pan out.

But here's the thing. If I had ALL my liquid assets in my brokerage accounts (rather than just 10%) and a really strong setup occurred and the signs were all favourable, would I really stick to 1% max risk - would I really stick to max 10%?

I'm not sure. Which is precisely why I operate the way I do.

Toward the end of this year (September) If I've been as consistent in my trading as I have been over the last year plus, I'll move my level up to 15%. No more than that though.

Too cautious? Maybe. But it's the way I currently find best suits my psychological profile and trading style.

I'm pretty certain it's going to be different for everyone.
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