Risk: 2% of my total account or 2% stop loss?

[CallMePaul]

Hello,

On many books, forums, etc, I keep reading that I should not risk more than 2% of my portfolio on each trade.

My question is, lets suppose I have an account with $100.000. That mean I should not invest more that $2.000 per trade (which will be super hard to make money if its like this) , or that my STOP LOSS order shouldn't be below the 2% and I can invest, lets say, $50.000 or $60.000?

I hope I made my question clear,
Thanks for your time!

 

[malaguti]

Hello,

On many books, forums, etc, I keep reading that I should not risk more than 2% of my portfolio on each trade.

My question is, lets suppose I have an account with $100.000. That mean I should not invest more that $2.000 per trade (which will be super hard to make money if its like this) , or that my STOP LOSS order shouldn't be below the 2% and I can invest, lets say, $50.000 or $60.000?

I hope I made my question clear,
Thanks for your time!

It should be 2% of your account being risked on any one investment and your total investments should never be 100%. i personally only have 3 or 4 on the go unless I know I can break even at worst, and then I will take another and another etc and will only ever be 60% or so invested at any one time.
Hope this helps

 

[CallMePaul]

Thanks a lot, it helps

 

[Trader333]

Do you know how you would go about ensuring that only 2% would be at risk and if so what approach would you take ?

 

[Purple Brain]

Do you know how you would go about ensuring that only 2% would be at risk and if so what approach would you take ?

Now I am worried. I've always taken a fixed percentage risk per trade and calculated that risk based on the number of pips from entry to my stop and adjusted the position size so that my maximum exposure is no more than that fixed percentage.

In other words, if my number of pips stop was X I'd take position size Y. If pips stop was 2X my position size would be Y/2. 3X and Y/3. So the more pips I'm willing to risk to my stop level, the smaller the position size - and the less attractive the trade.

Is that not the way to be doing it or is there a better way?

 

[Liquid validity]

Normally you would be OK doing that.
Where you can get into trouble is with
tight stops, yes max risk may still be 2%,
but account leverage could quite easily be 10:1
instead of 5:1
That would be most evident with slippage.
Keep an eye on position size in relation to bankroll size.
http://www.trade2win.com/boards/psy...on-sizing-compounding-keys-magic-kingdom.html

 

[NVP]

Hello,

On many books, forums, etc, I keep reading that I should not risk more than 2% of my portfolio on each trade.

My question is, lets suppose I have an account with $100.000. That mean I should not invest more that $2.000 per trade (which will be super hard to make money if its like this) , or that my STOP LOSS order shouldn't be below the 2% and I can invest, lets say, $50.000 or $60.000?

I hope I made my question clear,
Thanks for your time!

Hey dude .......who told you it was easy ?.....

and hint the small % we recommend per trade is there to stop you losing a lot of money .....

Rule 1 in trading is dont lose money (maintain capital)......

N:smart:

 

[Trader333]

Is that not the way to be doing it or is there a better way?

I am not sure about better but the way you have described will produce an inconsistent statistical probability that your stop will be hit in my view.

 

[NVP]

Now I am worried. I've always taken a fixed percentage risk per trade and calculated that risk based on the number of pips from entry to my stop and adjusted the position size so that my maximum exposure is no more than that fixed percentage.

In other words, if my number of pips stop was X I'd take position size Y. If pips stop was 2X my position size would be Y/2. 3X and Y/3. So the more pips I'm willing to risk to my stop level, the smaller the position size - and the less attractive the trade.

Is that not the way to be doing it or is there a better way?

on entering the trade you have to decide a price point decision re exits that are negative in value vs entry level..............any other Exit decision will be easier as it will imply profitability on the trade at that time ....

this will be the price where you have decided that the trade will be deemed unsucessful....and this is not necessarily the Stop loss point.....many traders use Stop loss as the safety net / parachute and exit before that point

focus on the point where you consider the trade is unsucessful and apply the % there ............and if you dont know then research research research till yu ofind somethign that works for you

I also hear a lot of people talk about 2:1 & 3:1 Targetted risk returns etc etc...........personally I take my trades with some solid % allocations regarding failure exits (based on as discussed) and then any profit is taken as the dynamics unfold .........I am never really targettign a 3:1 return based on the quality of the signal ...........a signal is a signal ...........

N

 

[Purple Brain]

I am not sure about better but the way you have described will produce an inconsistent statistical probability that your stop will be hit in my view.

I read that several times and I don't understand.

I thought we were discussing methods to limit risk to a predetermined percentage of capital for each trade, but your comments indicate you're discussing the probability of my stop being hit. Have I misunderstood?

If trade A has a stop of 30 pips and trade B has a stop of 60 pips and I wish to limit my risk to the same fixed percentage for each trade, I will carry a position size for trade A double that for trade B. The probability of my stop being hit for either trade is a function of the performance of my trading methods, not my position size I would have thought.

Just had a thought as I write this: Are you saying a stop of 60 pips is less likely to be hit than one of 30 pips? If so, yes I understand and agree with your comments. But if we use support and resistance levels or any other technical basis for setting stops, they are going to be within a band - and unlikely to gravitate around the same single value. For me trading the 15 minute charts on forex my stops are typically between 25 to 80 pips. Are you saying I should only take trades with the bigger stops (smaller position sizes) in order to increase my W:L ratio? If that is the case, surely my current W:L ratio needs to be known as does my average win per trade and average loss per trade as having more winners than I currently do with smaller position sizes (which I agree would probably be the case given your suggestion) would not necessarily yield a greater overall profit.

I'm stabbing in the dark here so would appreciate your comments.

 

[DitterPD]

I think this articles from babypips can help you. It's about position size and how to calculate it.
You need to have defined stop loss and % you are ready to risk.

Calculating Position Sizes | Position Sizing | Learn Forex Trading

 

[Trader333]

In my view, your approach does not factor in the volatility of the instrument you are trading. The volatility at the time you enter has a bigger impact on the probability of a stop being hit than setting a stop loss at a fixed distance from entry. If you don't factor this in then success of every trade is pure guesswork that over time will make a longer term trading strategy fail (again in my view).

 

[Purple Brain]

In my view, your approach does not factor in the volatility of the instrument you are trading. The volatility at the time you enter has a bigger impact on the probability of a stop being hit than setting a stop loss at a fixed distance from entry. If you don't factor this in then success of every trade is pure guesswork that over time will make a longer term trading strategy fail (again in my view).

How would I go about factoring in volatility at time of entry?

If for instance I enter long on audjpy at 89.85 with a stop at 89.50 with is the Monthly R1, yesterday's high and a half-century level (i.e. what I consider a reasonable confluence of technical support), what else do I need to be looking at, at the time of my entry which was almost 90 minutes ago, in order to give my trade a better chance of running to profit before running to loss?

 

[Purple Brain]

I think this articles from babypips can help you. It's about position size and how to calculate it.
You need to have defined stop loss and % you are ready to risk.

Calculating Position Sizes | Position Sizing | Learn Forex Trading

Thanks DitterPD. This is what I'm doing. I have programmed it in to automatically calculate the position size based on stop and percentage to risk for any given pair. I'm comfortable that I'm calculating my risk and position size correctly. What I am not comfortable with is that the basis for my stop setting may be far less than optimum, which is what I suspect Trader333 is trying to tell me and for which I am obviously extremely grateful.

 

[MarketLimit]

As you say $100.000 that mean you should not invest more that $2.000, it can feel like a little of investing, but once you encounter a loss series, then you'll be glad you did not invest more. Sure you could invest more but you have to use a tighter stop loss. I myself sometimes buy for more than 2% but then I only focus on that trade and im well aware of i could lose alot of money that i then have to earn back.

 

[ffsear]

Now I am worried. I've always taken a fixed percentage risk per trade and calculated that risk based on the number of pips from entry to my stop and adjusted the position size so that my maximum exposure is no more than that fixed percentage.

In other words, if my number of pips stop was X I'd take position size Y. If pips stop was 2X my position size would be Y/2. 3X and Y/3. So the more pips I'm willing to risk to my stop level, the smaller the position size - and the less attractive the trade.

Is that not the way to be doing it or is there a better way?

You method is sound and the same as mine. In terms of volatility, Just use logical places for your stop. Above/below swing high/lows, above or below important price action bars.

Basically pick a place on the chart where you can say... "I was wrong, time to get out"

 

[ffsear]

As you say $100.000 that mean you should not invest more that $2.000, it can feel like a little of investing, but once you encounter a loss series, then you'll be glad you did not invest more. Sure you could invest more but you have to use a tighter stop loss. I myself sometimes buy for more than 2% but then I only focus on that trade and im well aware of i could lose alot of money that i then have to earn back.

Sorry but why would investing more mean a tighter stop loss? It should only change your position size. Your stop loss should always be them same regardless.

Work out where your stop should be before anything else!

 

[Purple Brain]

You method is sound and the same as mine. In terms of volatility, Just use logical places for your stop. Above/below swing high/lows, above or below important price action bars.

It's a comfort to know I'm doing something the same as an expert, but I felt Trader333 was suggesting something a little more dynamic in addition to the standard support and resistance levels. Hopefully he will expand on this in due course.

 

[Shakone]

You can experiment with vol type stops Purple. For example you could set your stop 1 ATR below entry, or 2 standard deviations below or use some other measurement of the vol. Or just use recent price which in some sense takes into account recent vol.

 

[Purple Brain]

I'm all for experimentation, but presumably with almost 300k traders on this site there is a consensus for something a little more specific with respect to volatility?

Using technical support and resistance levels makes some sense as you're using statistically significant analysis based upon prior price action and reaction - there is empirical evidence to shake a stick at. While there is no guarantee price will ever conform to previous patterns and levels, neither does prior volatility presage future volatility.

Basing a stop on volatility could have me placing a wider stop than I need if recent volatility has been high or being taken out of the game with a small stop based on recent low volatility when it suddenly takes off.

I really appreciate the advice I'm being given and I'll roll up my sleeves and do whatever is necessary to do good research, but if volatility is a key factor in stop placement surely the mechanics of it can be more specifically stated.

For instance Shakone, what do you use?