154% in 4 days ?

[MikeW]

Attached is a word.doc which should help most newbies & probably some seasoned traders

It's part 1 of a free ten section trading course (Boucher, Mark - Short-Term Trading Course 01. Money Management.doc) so I'm sure I'm not causing any infringement of copyright etc. The others can be downloaded by anyone themselves & I posted the link on another recent thread.

Rgds.
Mike

 

[kevin546]

Chartman

Regarding your risk just to clear up for any new traders who might mistake your small stake size as your risk. The risk at £1 per point is the level of stop you apply. For example say you had a 10 point stop (this is the amount of price movement against your entry price you will accept before you decide to close for a loss) your risk on any one deal would be 10 x £1 = £10 per deal.

With your trading capital at £200 then your risk in % terms of your trading capital is 5%.

Some will disagree but it is suggested for novice traders when starting out that only 1% risk of your total capital should be considered until you have confirmed the success of your system. This helps to keep you trading while you feel your way to a successful approach. If you do not follow risk management at an early stage then through poor position sizing (trading in larger amounts where your loss is greater than 1% of your capital) you will lose more money and risk wipe-out before you have had a proper chance to learn the markets. The concept behind this is quite simple if you are new to this you will soon think you have the answer after a few profitable trades. Then you will start to take some losses. If you have not considered a stop position then you are likely to let the deal run against you by more than is practicable. Involving a larger loss than necessary through poor stops and or due to the to large a size of stake/contract/no of shares for your account size. With a 1% risk this provides you with an opportunity to trade 100 times before wipe-out and hopefully along the way you will see where you may have gone wrong and rectify matters before you lose to much money.

 

[donaldduke]

kevin546,

The 1% rule isnt just for beginers. If you read Market Wizards
some of traders there only risk 1% per trade and most
recommended never risking more that 2%.
Dr Van Tharp recommends traders should not risk more than 1%
per trade and newbies risk no more than 0.25% per trade.

Instead of increasing risk beyond 1-2% per trade, traders should
look for ways to increase number of trades made if they want to
increase profits.

Most good traders would agree that risking less than 1% of equity in a trade (where 1% is the amount you would lose if your stop loss was hit) is a prudent risk. Risking between 1% and 3% gets into the gunslinging range. Risking any more than 3% is usually financial suicide and the average trader commits financial suicide all the time without knowing it.

Dr Van Tharp

 

[chump]

Just to expand on that issue..

Make sure you have a rational for positioning of the stop otherwise you might just be placing a stop at a point of initial risk which enables you to take the trade.Fair enough if you are super confident about the trade.However, not so hot if your super confidence normally produces a low win rate.Analysis of that might show it is that 'false' assessment of the trade that gets you stopped out early and leads to the low win rate. May be not..

Also for arguments sake assume you are only trading 1% of capital on any one trade why should all the 1% go on at the point of entry ? If the market proves you wrong you lose 1%. If you trade 0.5% and let the market prove you right before you add the remaining 0.5% you will have better numbers always assuming this is done according to the plan you formulated before you made the original trade. We are of course trying to minimise losses and push our winners and this is one way of doing that .

There's a lot more to say on this subject,but the above might prompt others to add their views.
Cheers

 

[kevin546]

Donaldduke

I agree with what you say, I was using the 1% as a platform as other traders such as Elder or Piper recommend 1% and not more than 2%. You can take this issue further when you introduce other deals being taken at the same time all individually with no more than a 1% and not more than 6% of your total capital at anyone time. However this would again not be suitable for beginners but someone who has an established system.

Some will totally disagree with us and state they take a much larger % position which they are very comfortable with. In John Murphy's book he only briefly discussed this issue (his book 'Technical analysis of the financial markets' was published before the bear market so he may have changed his mind now) but he talked of no more than 5%. I think the main concept here is the risk issue is aiming to prevent you from wipe-out; either by keeping your % risk low so that you do not run out of money from a string of losing deals as you learn to trade or the prospect of a sudden and dramatic draw down like the recent spike on the FTSE when an individual entered an order for 6000 contracts instead of 60. Some people took a large hit getting stopped out even though they had applied quite wide stops. In the end if you are new and untested then the smaller your % the better. For a more seasoned trader then its what they are comfortable with provided they have considered the benefits of low risk and fully reviewed there system and its win average or win expectancy.

 

[kevin546]

Chump

I assume you are referring to the pyramid approach which can work very well in trending moves. I think it is all a matter of what you are comfortable with. Whatever your system whenever you enter there is no golden guarantee that your trade will be profitable from the time frame you are trading.

What is really going on is that if you have established and tested a set-up and it has over a reasonable period of time shown that the 'balance of probabilities' favour you to get a profitable trade then you will have more faith when entering such a deal, selective trading. Again if you have measured your system from a % win, win average or profit expectancy then you will be happy to use your stop if it does not work out comfortable you know your risk and that other trades will provide you with profit more often than you will stop out.

I prefer to use all my % risk when I get my entry signal simply because I have reviewed my charting and considered what produced the best entry price for best gain at the conclusion of the price move. The pyramid system is a very good way of building your capital within the market and for bigger players it is a way round the SB companies who restrict deals over £25 a point on the FTSE by slower fills and re-quotes. However and when discussing Tharp's approach his aim is to attempt large R multiples of profit per deal. R being your stop loss (risk). He advises letting your winners run which the pyramid does but at the initial entry you will have a lower % in the market so only that 1st part will receive all the benefit. Obviously there are lots of times when a second entry on additional support for a move will be seen quite close to the original move and so you can enter again but at other times the price may be much further away.

In the end I think there are no right or wrong methods just what you have found works for you is the formula that you MUST go with.

 

[kevin546]

Chump

I forgot to add to you stop topic. This can all depend on the signals you are applying to enter and not all require the same stop size. For example if following a failed re-test or failed break through signal you will be entering a deal against the immediate intraday trend (if day trading) such signals require entry very close to the important price level. In these situations my stop is set much tighter as there is a real possibility that the trend could just keep going. However on deals where I am following the trend then I can adopt a slightly wider stop.

 

[ChartMan]

Kev & Chump
Excellent points and I agree 100%. If you decide that 1% is going to be your risk ( reasonable) that doesn't mean £1 a point if you have £100 capital. It really means £1/stop points. So, if you think your stop loss should be 20 points, then your stake size should be £1/20 = 5p!
As for pyramiding, that's all well and good so long as you are sure (!) that the price has momentum, adding 1/20th. ( or whatever) on each pullback. So far, so good.
Two problems- you have to scale out or get out completely in good time, AND you have to remember your total position size and not leave one "in the pot"!!!! D4F used to be awful for giving you and instant "open positions" report, sometimes not updating for 30 mins + ( still true?). Fins is fine as open position report is instant.

 

[grubs50]

Would i be right in concluding that u all seem to be doing your analysis from the day trader's perspective? or do u think it is the same 4 long term trading i.e swing and position.....................if so, that should mean the initial capital requirements 4 long term trading 4 newbies would be considerably high then?

 

[JonnyT]

No the analysis is true for Swing Trades aswell.

You have to be mad to risk more than 3% per trade, I currently risk <0.5% per trade. Even with such a small risk I have returned 25% on account since Jan 1st with a single trade per day.

This gives an idea why if you have the right methodology and money management you can get great results with minimal risk.

JonnyT

 

[kevin546]

grubs50

I would have thought that for longer term trading you will require wider stops and to maintain a low risk you would need a reasonable sum to start with.

For example I day trade thought spreadbetting the FTSE100 which has a 3 point spread at present I have a fixed 7 point stop and do not think I can reduce it without getting stopped out too many times. With Futures I might be able to get away with 4 or 5 point stops due to the narrower spread.

However I suppose if I wanted to swing trade from the daily chart from one end of a channel to another then a stop of 7 points is not going to do it. I would think it would be more in the region of 25 - 50 points, maybe more. £1 a point tends to be the lowest deal size for most spreadbetting companies, at this level a £50 stop/risk would require £5k in order to maintain a 1% risk.

This would put you right at the top of your % range so a string of losses would reduce your capital and ability to work from this % risk. On this basis a starting capital of £10k would give you a bit more room for error with a starting risk of 0.5%. Most books I have read when talking about starting capital tend to suggest figures between £30 - £50k which I suspect is to much for many traders. I would say £10k is a reasonable starting point and I would not wish to use more than this until I had reached the stage where my system clearly works. All IMHO.

Chartman

Quite agree regarding pyramid it is a way to build up a larger size but you have to be able to get out. It is better suited for trend trading but the issue of getting out would concern me. Where spreadbetting seems to have better value is from the longer term trading where the spread is less of a problem. I don't think they still have problems re open position as you can establish your capital balance and see your confirmed orders at a glance. I have my order blotter on all the time and see the current balance change as the order is closed.

 

[grubs50]

ok thx 4 confirming the fact that it applies to long term trading 2 even tho, from my personal experience, i don't neccesarily agree with the fact that one needs such a high capital to start off..............there r so many ways to skin a cat.................and d risk would still be minimal .......