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 tomorton How do you make this out? Same way he declares a net loss as a net ...

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Old Aug 13, 2017, 12:09pm   #121
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Originally Posted by tomorton View Post
How do you make this out?
Same way he declares a net loss as a net win.
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Old Aug 13, 2017, 12:32pm   #122
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Originally Posted by tomorton View Post
How do you make this out?
Staring capital 100,000
after 1 LOSS capital 97,500
after 2 LOSS capital 95,062
after 3 LOSS capital 92,685
after 4 LOSS capital 90,368
after 5 LOSS capital 88,109
after 6 LOSS capital 85,906
after 7 LOSS capital 83,759
after 8 LOSS capital 81,664
after 9 LOSS capital 79,622
after 10 LOSS capital 77,632
after 11 LOSS capital 75,691


When you add in revenge trades , mistakes , double ups on size and the beginner Joe "get my money back from Mr MARKET" , the additional losses will result , as a result of above trades.This is more practical and really more likely , than your theoretical figures.
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Old Aug 13, 2017, 12:39pm   #123
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Originally Posted by foroom lluzers View Post
This is more practical and really more likely , than your theoretical figures.

And this is the conundrum concerning trading - it isn't hard and it isn't risky, but still so few people can do it.

The majority of traders lose because they cannot let themselves run a boring strategy, whether they bought it or built it.
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Old Aug 13, 2017, 12:49pm   #124
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People lose because they buy high sell low. Winners will always buy low sell high.
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Old Aug 23, 2017, 2:13am   #125
 
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3% is the most anyone should ever risk per trade.
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Old Aug 23, 2017, 9:34am   #126
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3% is the most anyone should ever risk per trade.
Do you know real profits in reality?
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Old Aug 23, 2017, 2:43pm   #127
 
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Unfortunately, all those numbers are arbitrary... you need to apply something like the Kelly criterion (not perfect, but a good start) on your past trades to determine the risk level for your trading system...
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Old Aug 29, 2017, 5:50pm   #128
 
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hi all,

I've done a lot of work on position sizing and would have to agree with Quantt here. There is no 'correct' position size. It depends on a lot of things, particularly your (or your investors') risk appetite and expectations.

I am learning Python and have built a basic simulation that can help you understand your trading edge and the impact of position sizing a bit more. unfortunately I haven't yet learnt how to get it online so you can play around with it yourselves but I hope to achieve that in the coming days. for now i'm happy to run anyone's numbers through it and feedback on here (or via PM) if it's of interest. I'd also appreciate feedback as to what other metrics people would think to be useful outputs.

Input variables (you should have a good grasp of these for your own trading):
- Account size
- % of capital at risk per trade
- Win rate(0-100%)
- Average win:loss ratio
- Number of trades (probably best to use trades per year to give idea of annual returns)
- The minimum returns you would be satisfied with (over that same time period)
- The maximum drawdown you would tolerate

For example: $100,000 account, 1% risk per trade, 35% win ratio, 4 win:loss ratio, 100 trades/year, min tolerated returns 10%, max tolerable drawdown 5%.

From these I can give the following outputs which I hope would help you understand your situation a little better:

Average Return:73.56%
Ave. Max. Drawdown:-7.68%
Ave Max Drawdown Duration:21.0
Average Max Cons Losses:9.0

Max Return: 130.0%
Min Return: 15.0%
Max Drawdown:-20.0%
Max Drawdown Duration:72
Max Cons Losses:19.0

Std Dev of Returns: 22.35%
Std Dev of Drawdowns: 3.16%

Probability of >10.0 pc return:100.0%
Probability of >5.0 pc drawdown:82.0%

So while it might look like a very attractive trading approach/system initially, if you're working at a prop shop with a 5% stop (you get fired when you lose 5% of capital) then all of a sudden it looks like 1% per trade is perhaps a bit much as there's a 82% chance you will exceed a 5% loss over the course of the year. If you already understand your trading approach/system it's unlikely you will see an improvement in your win rate or win ratio over the long run so optimising your position size according to your risk tolerance is your best bet of holding on to your capital/your job whilst maximising your returns. It all relies on a good initial understanding of your trading though which most retail guys lack unfortunately.

It always pays to remember also that every trade you will ever take will be either too big or too small...!
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Old Aug 30, 2017, 9:52pm   #129
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Your % risk should be somewhat based on your maximum expected number of losing trades/drawdown and the frequency of the trades too.

So if you are a high frequency scalper who regularly takes 7-8 losing trades in an hour , 1% is probably too aggressive . Conversely a position trader taking one trade a month and who maybe expects a maximum of 4-5 losses before a drawdown ends , 3-4% seems more appropriate . All depends on what you could tolerate as your max dd

There are probably some very good formulas out there to work out this kind of thing too
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Old Aug 30, 2017, 10:09pm   #130
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Originally Posted by Quantt View Post
Unfortunately, all those numbers are arbitrary... you need to apply something like the Kelly criterion (not perfect, but a good start) on your past trades to determine the risk level for your trading system...
I agree, I work with 2% as in my plan. It has to be a truly exceptional circumstance to move from this. Last week when Provident took a dive was the only time in many months that I made a decision to increase risk threshold. And not by much to be honest. If news feed had not included top guy walking out I would of used 2%.
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Old Mar 2, 2018, 10:52am   #131
 
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I also try to trade as conservatively as possible and stick to the MM. But the market is so full of temptations and sometimes provides such opportunities that you cannot resist)
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