Why only 1% Capital Risk when trading

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Old Jan 12, 2005, 12:33am   #1
Joined Jul 2001
Why only 1% Capital Risk when trading

Hi, I know we have "Money Risk Management" forums but I was thinking it may get more exposure (IMHO that, I think it deserves)

I have been researching various trading methods, for six months, that may or may not give me an edge in trading. I now want to move onto another part of my research. HOW NOT TO LOSE MY SHIRT.
I have often seen it mentioned that we should only risk at any time 1% or 2%( if your a high roller) of our trading capital at any time.

What I hope is that some members might enlighten me(and other newbies) with real experiences of what are the consequences of not listening to this rule. Also what are the real benefits of using a robust Money & Risk Management System.

Maybe also, what are some of the Physiological pitfalls that might be waiting to pounce.

Thanks
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Old Jan 12, 2005, 12:40am   #2
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I think that the idea is to keep a trading capital even when you hit a losing streak.

If you hit a bad run of trades with 10% at risk on each one, you are out of the game quick.

If you keep to a small %, then you can take a greater number of losers and still have an account to trade your way back up again with.
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Thanks! The following members like this post: ford
Old Jan 12, 2005, 12:55am   #3
 
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Most good systems can have 10 losers in a row, add in slippage etc you can easily see your
self down 12% (using 1% per trade), or 25% assuming you are using 2% per trade.

If you use 3%-5% then you could get drawdowns of between 30 and 50%.

A 10 or 20% drawdown does not require that much more effort to get back to breakeven but a
40%-50% drawdowns require a very high rate of return to get back to breakeven:

A 10% drawdown requires a 12% return to get back to breakeven.
A 20% drawdown requires 25%.
A 25% drawdown requires 33%.
A 33% drawdown requires 50%.
A 50% drawdown requires 100%.

Its unwise to risk more than 2% unless you have a system with small drawdowns (high win rate, giving
few losers in a row etc).
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Old Jan 12, 2005, 1:30am   #4
 
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Well put DD.

Also there is the psychological burden incurred when risking an amount in excess of one's comfort threshold. A 1% loss is less likely to lead to a sudden failure of discipline than a 10% one.
Although 1% sounds small one can still return a surprisingly large amount on capital with a good system.

Personally speaking, the result of risking more than 1%-2% was the loss of half my capital in a few months. I wouldn't advise it unless you are a brilliant trader
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Old Jan 12, 2005, 1:36am   #5
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Gardan started this thread Ardhil/donalduke thanks, what is the realtionship between capital risk and where a stop loss risk is.
By that, I mean as I understand it the calculations to get to a 1% risk base is from my total capital fully margined (is that correct?) capital.

But if I place a stop loss say 10 cents away from entry on the purchase of 1000 $50 shares is my risk $100 (10c stop x 1000 shares = $100)

or is it 1000 x $50= $50,000. if so why. Is it possible to experience 100% slippage on a stop loss.
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Old Jan 12, 2005, 3:48pm   #6
 
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You're right, Gardan.

The stop loss IS the key element here. You wouldn't get anyway trading only 1% of your trading capital. Your stop loss is your risk thus should be tallied as such to make up your 1-2%.

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Old Jan 12, 2005, 7:23pm   #7
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Your risk exposure on the above trade is $50K and I know of cases where people have been over exposed and lost everything in their margin account and also owed money they did not have. The simple rule to follow is this: Do not enter a trade where your exposure is greater than your account balance.


Paul
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Old Jan 12, 2005, 7:55pm   #8
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Thanks Paul

Gardan started this thread
Quote:
Originally Posted by Trader333
Your risk exposure on the above trade is $50K and I know of cases where people have been over exposed and lost everything in their margin account and also owed money they did not have. The simple rule to follow is this: Do not enter a trade where your exposure is greater than your account balance.


Paul
Hi Paul,Just to clarify that, do you mean Unmarginned account.

Therefore with say $20k capital (unmargined) in your account, one would be limited (using the 1% risk rule) to trading only one 1000 lot size on a $20 stock-with a 20c max stop loss. Or 500 lot size on a $40 stock-20c stop loss, and so on. Is this correct?

Also if possible can you expand on how they lost all there money , did they use stops? and why is the stop not the risk point. Are stops unreliable? or are they just a safety net.
Without trying to sound rude , why can't a stop be used as the calculation.

This may sound like I wish to use the stop as the calc, not so, I just wish to understand my risks before I start trading live.

Roll on 2020.

thanks
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