Gardan's 'How Much to risk per trade' poll

[DaveJB]

Gardan needed a bit of a hand, hence my name's on this <g>

Following extensive discussion on how much of the trading account should be risked per trade, how much do people REALLY think it's appropriate to have at risk on a trade, as opposed to what they've read?

Dave

 

[Gardan]

Gardan needed a bit of a hand, hence my name's on this <g>

Following extensive discussion on how much of the trading account should be risked per trade, how much do people REALLY think it's appropriate to have at risk on a trade, as opposed to what they've read?

Dave

Dave, I voted 5% of total capital invested. assuming a trader has capital less than $250k , as the traders pot gets bigger,
IMHO, what I think I learnt from these boards, is then reduce the risk ASAP. This is also assuming a strict trading plan with known stop-loss positions, before every trade.

eg : $500k trading capital = 3% ? and $750k and above = 1%

 

[timsk]

Gardan,
I agree although I would scale down the account size. I would guess that there are very few private traders with £250,000+ in their trading accounts, let alone £750k. So, for a PDT with, say $50,000 in their account, then I would imagine 1% or less. For a someone with a SB account like myself with a mere £2k (ish) in their account - then up to 3% maximum.
Tim.

 

[DaveJB]

Personally I think 'risk' and 'how much invested per trade' are connected, but not linearly. Consequently what you trade is important. If I want to put a percentage figure on it then my tack is to say 'how many times can I get it wrong before my account is zero'... divide that into 100 and you have the percentage you can 'afford' to lose per trade. If you are betting red/black in a casino losses on bad trades are 100%, if you are trading something with a guaranteed stop you might be down 2% per losing trade.... what you are trading affects how much you lose on a losing trade - so it's part of the equation and must be included in the decision.

Balancing risk out I think 5% is maximum risk for the sort of thing I do... ie if a position is down by 5% of my pot then it is starting to hurt and I need out. I do not feel the same need to exit when 1% down, or 2% - my 'comfort zone' is from about 2.5-3%, above that I start to figure the trade is likely to go against me. I will have a stop calculated before I enter, based on TA - I won't enter if that stop entails a 5% loss of account balance. So I'm going to pick 3-4%.
Dave

 

[Gardan]

Ten votes only three comments??? be great if you guys/gals could throw in, a why you voted the way you did.

Thanks Gary

 

[nobrainer]

Personally, I'm always prepared to risk more than 5% of my trading account on any of my daytrades.Whether , its 'sensible' depends on the individual.Trading to me is about pushing myself as far as I can go in terms of trade size whilst feeling that I'm still in control.
If a type of trading style works in a bull or bear market, its best to really keep trying to maximize position size and hence profits to take advantage of it ,surely?
The only parameter which is important is to have a minumum weekly profit target as a daytrader imo.As long as you always achieve that, all other constraints are not ''sensible'' as they will just reduce chances of real outperformance imo.

 

[roguetrader]

Ten votes only three comments??? be great if you guys/gals could throw in, a why you voted the way you did.

Thanks Gary

Sorry was not really thinking when I cast the vote My trades are intra-day, my risk may be as high as 2% but in general I don't feel the need to risk more than 1% for most of my trades. I tailor my trades around this level and it is comfortable so it works for me.

 

[DaveJB]

Also your typical win:lose ratio, and max number of losers come into play - if you have had 50% winners consistently for the past 10 years, and never lost more than 3 consecutive trades, a 5% limit would be (in my view) very conservative. That's obviously an exaggeration to make the point, but the principle is okay I feel... there are a lot of factors that determine 'correct' trading, seldom does one parameter operate in isolation.

 

[Salty Gibbon]

I risk no more than 0.5% of my capital pot on any one trade and often somewhat less.

I believe that if I upped the risk to 4 or 5%, my behaviour during a trade and my management of that trade would probably be adversely affected by the dreaded thought of losing what I would consider to be an unnacceptable amount of money.

I prefer to be ultra conservative because trading is firstly about capital preservation and secondly about making money from that preserved capital.

Besides I don't have enough pairs of brown trousers to accomodate a 5% risk per trade strategy.

 

[rog1111]

DaveJB makes a a very valid point. Also what % of your overall equity are you prepared to lose via max drawdown ? Generally, my DD tolerance is about 25%, and for my main strategy I believe that 10 consecutive losers are possible, if unlikely. Therefore if I set my % risk at 3% per trade, then during a bad streak I could drawdown a (just) tolerable 26% :-

$X x 0.97 x 0.97 (10 times) = approx 0.74X.

By the same logic, other methods with higher win:lose ratios, ie shorter losing streaks, can handle more % risk per trade.

Not that it's that easy using futures with fixed contract sizes !

rog1111

Also your typical win:lose ratio, and max number of losers come into play - if you have had 50% winners consistently for the past 10 years, and never lost more than 3 consecutive trades, a 5% limit would be (in my view) very conservative. That's obviously an exaggeration to make the point, but the principle is okay I feel... there are a lot of factors that determine 'correct' trading, seldom does one parameter operate in isolation.

 

[DaveJB]

Hi Salty,
yet another parameter with a valid input, so you'll get no argument from me - carried to a bit of an extreme perhaps, but you might be a winning trader when in your comfort zone, but a very poor one whenever you feel your trades are unduly risky. Now, if you analyse your record etc it may be that your 'risky' trades are anything but that - but it's your perception that counts.

It's in this sort of area that I'm prepared to accept what I would otherwise call psychobabble - I'm psychology averse you might say <g> - but it does have a place in working out what to do next... and if your risk% has cutoff levels where it affects your trading, and you can recognise them, it's useful information.

That rather cuts two ways of course - if your 'levels' are set really low, so that you can't generate profits worth having because your risk tolerance is too low, then trading is actually the wrong thing to have your money in... not a personal comment there, a general one!

Dave

 

[mpjordan]

This year I am trading at 3-4 % risk, I find that having a bigger risk, helps my money management, it keeps me out of boredom trades, having a punt, chasing losses, etc. I have to be more certain of a trade( as one can be) before entering. My stops are fairly tight and position size large. So far working very well, but still plenty of time for it to go tits up.
I also avoid targets as I find these encourage me to trade when I shouldn't, ie to force a trade to meet a target.

 

[ardhill]

What percentage risk, per trade, is sensible?

Actually, I voted for MY risk level.

I feel that each of us are different. I am risk averse, so 1% is top for me, others may be happy, and profitable, with more. Right now, risking 5% on any one trade would be way too scary for me and I would probably get out of the trade far too soon.

Saying that...

I have a SB account with not too much money currently in it, I am happy to risk a lot more than 1% of that 'cause if I blow it, I will just put more in the account. The 1% thing is to do with my daytrading account, which has considerably more money in it.

 

[ardhill]

This year I am trading at 3-4 % risk, I find that having a bigger risk, helps my money management, it keeps me out of boredom trades...

Sounds fair enough to me. Also good to see someone who understands their own psychology and makes the appropriate changes to their trading, boredom trading can be lethal - believe me, I know.

 

[roguetrader]

, but you might be a winning trader when in your comfort zone, but a very poor one whenever you feel your trades are unduly risky. Now, if you analyse your record etc it may be that your 'risky' trades are anything but that - but it's your perception that counts.

Dave

Very valid point which is what I meant when I said "I tailor my trades around this level and it is comfortable so it works for me."

It's kinda like when you'r out at night walking and something spooks you, your whole perception of your surroundings change, your senses are hightened, sounds seem louder than they were before things look a little different. So it is with the market, I find if I move outside what is comfortable, risk wise, my perception of the market changes and that will sffect the decisions I make. For me trading is not about making a killing it's simply another job to make a living. As such I don't care if I could make more with a bigger lot size, and higher risk, or that I leave some on the table (as long as it's not too much ) And I don't care if I provide my broker with a lot of trades, as long as I'm making a living.

 

[Mayfly]

I don’t know if these have been mentioned elsewhere on these boards (apologies if they have), but there are a couple of links that I think a particularly good on the question of trade size and risk management, etc:

http://members.aon.at/tips/index.html

http://www.traders2traders.com/papers/Ryan.Jones.MM.htm

I think you’ll find the stuff on Thomas Pflügl’s website pretty much covers everything you need to know, always accepting people will have their preferences and ways of going about these things!

HTH

Cheers

Mayfly

 

[ducati998]

All the comments so far have only really addressed "Market Risk".
The risk that I evaluate is business risk, and or asset risk. Market risk is irrelevant to my investing style. However, having said that I would place currently no more than 33% of my account on any 1 investment.

While I appreciate the importance of risk management, and this must be the starting point, to progress in capital gains, you must eventually do it with size.
This is where daytrading really falls down. The size that you can commit is severely limited by your need to manage market risk.

For example, take a hypothetical $100K, dependant upon if you use margin, this may well be $400K. What position size will you commit to 1 trade? In my scenario, I will commit $132K to one investment, I can do so as my risk is not tied to market risk. Therefore, assuming a modest 15% return, my dollar return is leveraged making it highly profitable. Yet from the comments so far, this level of exposure would cause anything from mild anxiety to a full blown coronary.

Cheers d998

 

[halldorpb]

I agree with nobrainer (this sounds impressive) that there is no specific limit to what is a sensible risk level...although I would like to add that it is immoral to risk what you don´t own in addition to your 100%. For example. if I wanted to buy Microsoft for the dividends and didn´t use a stop loss, I would in effect be risking 100% initially, but whenever the dividend got paid the maximum possible loss would go down. And seriously, the changes of MSFT tanking in three months are very low. Risk depends entirely on your style.

 

[halldorpb]

I agree with nobrainer (this sounds impressive) that there is no specific limit to what is a sensible risk level...although I would like to add that it is immoral to risk what you don´t own in addition to your 100%. For example. if I wanted to buy Microsoft for the dividends and didn´t use a stop loss, I would in effect be risking 100% initially, but whenever the dividend got paid the maximum possible loss would go down. And seriously, the changes of MSFT tanking in three months are very low. Risk depends entirely on your style.

Although I would certainly not buy MSFT for the dividends

 

[roguetrader]

While I appreciate the importance of risk management, and this must be the starting point, to progress in capital gains, you must eventually do it with size.
This is where daytrading really falls down. The size that you can commit is severely limited by your need to manage market risk.

For example, take a hypothetical $100K, dependant upon if you use margin, this may well be $400K. What position size will you commit to 1 trade? In my scenario, I will commit $132K to one investment, I can do so as my risk is not tied to market risk. Therefore, assuming a modest 15% return, my dollar return is leveraged making it highly profitable. Yet from the comments so far, this level of exposure would cause anything from mild anxiety to a full blown coronary.

Cheers d998

Hi d998
I guess it really comes down to what your trying to do, make money or make Forbes. To give you a eg on a play Friday using your account model of $100k. The play was a broad market short based on the general weakness in the markets, their inability to rise all morning despite reasonable add/dec and not unreasonable breadth. Target stock DIA, trigger new lows coming out of lunch. New lows were under 104.54, stop above highs of last intraday consolidation at 104.80, this gives you a stop risk of .30, (assuming a poor entry at 104.5) in your model that is 3000 - 6000 shares giving you a $900 - $1800 risk on the play = 0.9 - 1.8%. The capital outlay to take that trade on at those levels is $313,500 - $627,000. Clearly even 4:1 margin prevents the maximum trade in this scenario. My point being that if your risk calculation is defined purely by your stop x position size then it does not mean your positions are small. You will note that I would appear, with a max 1 -2% stop, to be one of the more conservative people. Your $137,000 position would not on it's own give me cause for concern, the question would be whether the stop on it would?