percentage of capital at risk

How much do you think is a suitable percentage of capital to risk in one trade?
If I remember correclty Elder says something like 3% of capital, in his book "trading for a living".

Do you agree this is something to start from?
How much do you put at risk in a "standard" order?

It depends on a lot of things, including timescales (day-trading would be a lower percentage than longer-term position trading), markets (low or non-margin instruments will probably require a smaller % otherwise your bank will get swallowed up in securing the trades), and your actual or assumed win/loss or risk/reward ratio (a method based on a high percentage of successful but lower profitability trades would justify a higher % than one with a lower strike rate, but higher profits per successful trade because your drawdown risk is lower).

For me, a medium term position trader, I generally work on between 1-2%.

Thanks for an informative answer!

expensif said:

How much do you think is a suitable percentage of capital to risk in one trade?

Click to expand...

Have a look at the Optimal F methodology.

Try a google 1st.

I have to agree with Jack O' Clubs.

Personally, being a position trader of stocks, I risk 1% per position. Sometimes I can have multiple positions in a stock as I pyramid winning trades.

In general, I would say that if you risk more than 3% a trade, your trading capital can be vulnerable to some wild swings up or down.

Thanks,

Damian

well, i reckon everyone risks 2-3% and most dont get far.

i'd go for 8-10%

this way, when you lose, it hurts, and you make sure you learn something. when you win, it makes it worth your while. it installs a sense of patience for the right trade that most never knew they had!

ok you may get 10 losers in a row and do your beans. whats the probability of 10 losers in a row if youre winning say 60% of the time? not that great. youre more likely to get 10 winners in a row and double your account plus some. risking 2% is going to be a never ending saga to double your account. (i read that the average retail account is between 20-50k - about the level most consider an average years salary to give up the 9-5. im aware thats not everyone, i just say this as a yard stick)

maybe im missing something here. maybe im just a piker here and you guys have already made millions so can afford to risk only 2%?

i never believed common money management theory anyway (most of the time they are talking about risk management anyway, so why should i listen if they always put wrong labels on stuff?)

of course, all this assumes the trader is profitable in the first place. if the speculator is not profitable, then i guess 1-2% is about right. size does help in trading though - but thats another thread.

jmt.

I think it all depends on your own personal tolerance for risk.

If you risk as much as 10% per trade then, as you rightly say, there's a chance you could have 10 losers in a row and blow your account - 10 losers in a row is a very realistic prospect even on a system that wins 60% of the time.

Personally, i wouldn't want to trade in a continual state of fear of blowing my account. Even just having 5 losers in a row (which would be a common occurence) would wipe out half your account! You''ve then got the stress of having to double your money just to get your account back to break-even again.

You could be trading an excellent strategy, but by risking too much per trade your strategy becomes useless.

I have never come across any system where risking more than 3% per trade has been valid. Even at 3%, then 10 losers in a row would knock a third off your trading account, and this is about the limit that most traders seem to be able to deal with psychologically.


Thanks

Damian

Personally I think that depends on where you are on the trading spectrum. If you have enough money to be able to make the difference in your trade cost with a 3% investment that is wonderful.

If you are a beginning trader with say 20-30k and are growing that nest egg then it makes no sense to simply invest 0.4k - 0.6k as the profit that you most likely will take will be eaten by the cost of your trades.

Staying risk averse is a nice stance to have but not having the egg to stay risk averse will probably cause you to invest more in each stance. As my amount of money is growing I have diversified likewise. I started with 2k back a year and a half ago. I am now trading with around 10k after taxes and everything else is paid. At 2k I was playing at 100% investment per trade. Now I have 5 stocks or positions generally, and as my base increases so will my number of investments.

That being said, I have seen my account go from a 25% loss one day to a 50% gain the next so you had better chose wisely and be ready for the long haul.

I see some advocate larger percentages and some smaller...

What do you think of pyramiding "winning" trades? Start out with a small risk, and adding more to trades that seem to be profitable?

Seems to me that it would be better to put everything in at once, since the longer you wait before entering the trade the sooner it could be over and you would thus miss out of a portion if you didn't enter full scale at first. On the other hand if the trade goes bad you would lose more when risking everything at once. How does the ratio of wining trades influence on this risk. The more winning trades, the better it would be to risk everything at once, right?

Not sure there's a 'right' answer to pyramiding. Some do it, others don't. I use it occasionally if I enter on a less convincing signal, and then add to the position when it's confirmed as working, but more often I simply won't take a trade if I'm not wholly confident. I think theory points to pyramiding as worthwhile, but like you, human nature can get in the way of that, and if I think a position is a good'un I'll want to be invested as soon as possible.

CC's reply (8-10%) highlights some other factors, which in theory shouldn't make a difference, but in practice do - if your bank is pretty small, and 1-2% positions aren't going to make any difference to your overall wealth, then you're going to get sucked into bigger trades. However, I think that if you examined the 90% of traders who are commonly accepted to be losers, a very high proportion of them would be people who were under-capitalised and placed inappropriately high stakes on each trade.

CC is right that the chances of 10 successive losing trades is low, but the probability of, say, a 50% drawdown over a period of time from which it would be hard to recover is far less so. Even 5 losers in a row, which would halve your bank, is a 1% probability under CC's stats. 1% for a day-trader is going to happen every few weeks or months.

Maybe CC's been lucky, maybe he's exceptionally good at spotting opportunities, but running your money management on the basis of how much money you want to make from a fixed bank looks like the road to ruin to me.

Definitely a personal tolerance. Depend on what your average win/loss ratio and how your psychology deals with loss. Do not allow yourself to ge tto the point where you are too scared to place the next trade due to a string of losses and a larger than you can handle draw.
Better to start smaller than you feel comfortable with and have a methodology to increase risk as things start to be consistently profitable and cut back if they do not. I would avoid things like Optimal F and Fixed ratio. Just go for a fixed fractional methodology with a volatility measure built in ala turtle idea.

I support and use the idea of pyramiding massively.

If you add to winning positions at the right time, it can greatly enhance your profits over the long-term.

But I must stress, it has to be done right. Pyramiding is an advanced technique and not for the novice trader just starting out. Pyramiding will enhance profits of an existing profitable strategy - it will never turn a poor strategy into a good strategy.


Thanks

Damian

This is quite interesting study.

http://www.turtletrader.com/position_sizing.pdf

expensif said:

How much do you think is a suitable percentage of capital to risk in one trade?
If I remember correclty Elder says something like 3% of capital, in his book "trading for a living".

Do you agree this is something to start from?
How much do you put at risk in a "standard" order?

Click to expand...

I think it will very much depend on the size of your account. If your have enough cash 3% is okay, otherwise your will have to take more risk to make any significant amount of money.

What interests me about this thread is that the general opinion seems to be that it is ok to take a bigger risk with a smaller account.

Why do people think in this way?

A trader should be risking the same 1%-3% whether they are trading with £5,000 or £5m.

It is completely illogical to start thinking you should be risking more with a smaller account.

If risking 1%-3% of your trading capital means you can't afford to buy 1 lot or contract of whatever market you want to trade in, then you are under-capitalised.


Thanks

Damian

Need to look at the total assets of the investor

damianoakley said:

What interests me about this thread is that the general opinion seems to be that it is ok to take a bigger risk with a smaller account.

Why do people think in this way?

A trader should be risking the same 1%-3% whether they are trading with £5,000 or £5m.

It is completely illogical to start thinking you should be risking more with a smaller account.

If risking 1%-3% of your trading capital means you can't afford to buy 1 lot or contract of whatever market you want to trade in, then you are under-capitalised.


Thanks

Damian

Click to expand...

Damian

Your logic is correct if the size of the account represents the same percentage of a person's total assets in each case. However I should think that a $5k account represents very different things to different traders. On another thread someone thought £4k was a lot of money, so to that person 1-3% might be appropriate. To another person £4k might be an insignfiicant part of their total wealth and so they might be prepared to risk 100%. However, for them, if the account was £100k they might drop down to the 1-3% comfort zone.

Each week I have a very small lottery account (£1 to be precise) and I am willing to risk 100%, but this is not acceptable on my much larger trading account

Charlton

From reading ths thread it seems a little confusing to me exactly what is being discussed when talking of how much capital is being put at risk. Many of the posts refer to position size as the risk, whilst it is not inconceivable for a position to sustain heavy losses, for the most part the risk will be determined by your stop whether hard or mental. Possibly I am misunderstanding many of the posters.

What interests me about this thread is that the general opinion seems to be that it is ok to take a bigger risk with a smaller account.

Click to expand...

Personally I would not consider account size to be particularly relevant in determining the amount of risk to take on any particular trade. The interaction of your win/loss ratio and risk to perceived reward are far more important. A disregard for capital preservation will soon lead to no capital and no trading, this is why under capitalisation, a much overlooked factor, is a major would-be trader killer. All in my humble opinion of course

I just noticed someone mentioned with regard to risk what that particular sum of money menas in terms of wealth to the individual, personally I would say that is irrelevant, if you have a $10,000 account and are risking $200 to make $100, then that is a bad risk, and if you have a $100,000 account itis still a bad risk, even though the loss will seemingly hurt less.

Hi All,

Charlton,

I agree completely that different amounts of money have different significance to different people with varying net worths. To some people, losing 5k of capital is a drop in the ocean whereas to others it would devastate them.

I think it all depends on what a trader's motives are for playing the markets. For some, it is pure entertainment and they enjoy dabbling with their 5k and they are prepared to lose it all, and if they do lose it all, then they accept that 5k was the payment for that entertainment.

Then there are others who do approach trading as a serious business opportunity. These are the people in my view who should be managing their risk carefully whether they have 5k or 500k. I think the danger comes when you get a high net worth individual who dabbles and takes a high risk with his insignificant 5k, but is lucky and doubles that 5k very quickly. They then start thinking that trading is simple, and they open a 50k account, but carrying on taking a big percentage risk because that worked on their smaller account. They eventually hit a losing streak of 5 trades in a row and wipe out half their account because they are risking far too much per trade.


Roguetrader,

QUOTE: "Personally I would not consider account size to be particularly relevant in determining the amount of risk to take on any particular trade."

I'm afraid I cannot agree with this.

Surely your total account size is absolutely paramount in calculating how much to risk on a position. If your account size was 100k, would you risk the same amount of money per position as if you had 10k in your account? Surely you'd choose to risk much more per trade on the larger account?

I do agree though that risk/reward is a massive consideration. a 1:2 risk ratio is not a trade I would personally want to take on no matter how big my trading account. With this sort of risk/reward ratio, you could be right 2 times out of 3 and still only break even.


Thanks

Damian

Surely your total account size is absolutely paramount in calculating how much to risk on a position. If your account size was 100k, would you risk the same amount of money per position as if you had 10k in your account? Surely you'd choose to risk much more per trade on the larger account?

Click to expand...

Ok sorry perhaps I was unclear, I was mistaken into thinking that the original question of the thread actually referred to % not simple $ value, and that some things could be taken as a given, such as if you have a $1000 account you cannot risk $5000. (Yes I know someone will mention margin and leverage, but frankly if you like to risk more than you have good on you, see you in the markets) and so I stand by my remark that your account size is largely irrelevant in calculating how much to risk on a trade, a bad risk is a bad risk regardless of how much money you have.

If your account size was 100k, would you risk the same amount of money per position as if you had 10k in your account?

Click to expand...

In % terms probably, but a $10,000 account is rather small so I would have to sit down and do the maths, failing being able to make it work then I would have to trade another style or wait until I had an appropriately funded account

expensif said:

This is quite interesting study.

http://www.turtletrader.com/position_sizing.pdf

Click to expand...

page 12: Women will as a group gain higher profits than men.

page 20: "...this risk of losing all his/her capital was 10 times greater if the trader had NOT been given a lecture in position-sizing, risk management, and psycholigical biases".

Their chances increased tenfold of staying in the game by attending a 3-hour lecture!!

All this for a random marble as deciding a trade outcome.

Thanks expensif for the link. I will read it at the beginning of each trading week.