Risk Management

[Helenqu]

Hi all,

A link to a superb (IMHO) article on risk management. Very conservative approach and sensible.

http://www.cybertrader.com/cybertraderreview/v1i11/1percentrule.asp

 

[FTSE Beater]

I must say that is the best, and most sensible article I have ever read.

If only I had read that 3 years ago.

Thanks for the link Helen.

 

[steve-th]

An Intersesting article for sure but a pretty boring strategy. Risking 1% eachtime requires funds most of us don’t have in order to make decent money unless you have loads of dosh to start with in which case why not retire.
If you have loads then there is a foolproof method of winning on a fifty fifty bet. Suppose you bet $1 on the throw of a dice and lose. The next throw you double the bet to $2 (not reduce it as the article suggests). You carry on doubling the bet every time you lose. Eventually you will win 1 throw giving you a net profit of $1. You then start again with a $1 bet and repeat the doubling until you win $1 again.
The chances of you losing over 20 times in a row are over 1,000,000 : 1 This is why casinos effectively ban the system by imposing min. and max. bet sizes on the roullette table.
It works but if you already have a million are you going to spend your time winning $1 bets???
Steve

 

[simy]

Load of c^&p, that could work on win or loose situation but what about the spread, cost of using stop losses ?

 

[RogerM]

Actually I agree with Helen! Boring it may be, but I trade for profit, and the more boring the better. I get my excitement elsewhere. And you don't need to have a massive account to use a 1% stoploss.

With a £5,000 account (say $7500), 1% is £50, or say $75 if you trade the US. If you daytrade a share at say $50 a share this means that if you have a 25c stop on that share, you can trade 300 shares. This is $15,000 worth, a gearing of 2x. CMC let you gear up 10x on blue chips if you want to! If you capture a 50c move, that's a profit of $150. Quite practical I would have thought.

 

[Helenqu]

Perhaps I ought to clarify too.

I trade STOXX futures with a 1% stop loss and an account size of £5000. My trailing stop is set at 6-7 points per trade and that is perfectly adequate for most situations enabling you to place sensible technical stops. I don't have a large account and that is the very reason I am ultra, ultra careful
However STOXX futures are comparatively cheap at 10 euros (which is why I chose to trade them, horses for courses).

 

[Mr. Charts]

RogerM is, as always, quite right ;-)
But where, the question is, does he get his "excitement"? ;-))
I trade US shares and futures for a living and never, ever risk more than 2% on all combined positions, i.e. if all positions were to simultaneously go against me, that would be my maximum loss.
In fact, I am usually at least partially hedged so am rarely exposed as much as 1%.
Steve, I agree that article is faulty in at least one respect. To reduce your risk on each losing trade is counter-productive as it makes it more difficult to recover. That sort of strategy is only suitable for beginners to protect their capital, not for professional traders.
However, your idea of doubling is the well known Martingale (?)system and will result over a long run - and usually much sooner, in total financial ruin. As you say, who wants to end up risking a huge amount to gain one pound.

 

[tomorton]

Mr Charts is right about the doubling-up gambling system - it is actually known by the name Gambler's Ruin by some people.
The 1% risk is a good rule for staying alive in the markets. I haven't done well over the last 2 years longing UK shares the traditional way, but risk management has kept me in the game with capital left.
The 1% risk rule applied to share purchases can be used in this way - suppose you have £50,000 total cash and you buy £10,000-worth of shares. Risking 1% of the total would give you a maximum loss on the £10,000 of £500, that is 5% of the investment, not a bad choice of stop-loss for buying shares. Each subsequent £10,000 investment would carry its own £500 stop-loss, again 5% each, but money management would suggest you avoid going 100% shares except for the shortest periods.
There are many ways to win this game, but the only way to lose it is to get wiped out, which is easy to do.

Best wishes all.

 

[kako]

what a pity....i'm looking for a good martingale article and this link is broken. it seems cybertrader changes into a broker now.

does any1 have that article?

thnx in advance
........................................................
Kako

 

[tireg]

Article's down, but if anyone's ever read Dr. Alexander Elder's Come Into My Trading Room he talks about something along the lines of what you guys are discussing.

It's his 2%/6% rule -- basically, never risk more than 2% of total capital on any given trade - ie: entry price - stop price = risk per share (RPS). Now divide 2% of total capital by RPS to figure in max. entry size.
6% rule means that you should limit your "exposure" to 6% of total porfolio. IE if you were stopped out on all trades, you'd only be down 6% of total portfolio. Combined with 2% rule, this allows a max. initial entry of 3 positions, assuming all of them are maxxed out at 2% risk. Now, as your positions go your way, you have more exposure available, since you'll be raising your stops and hence the exposure to the market becomes less, until it becomes "negative" (profit stops). Very interesting theory, I've been applying the 2% rule quite well... but the 6% exposure can be frustrating at times, esp. when market's hot.

Any thoughts?

 

[AlexBB]

Article's down, but if anyone's ever read Dr. Alexander Elder's Come Into My Trading Room he talks about something along the lines of what you guys are discussing.

It's his 2%/6% rule -- basically, never risk more than 2% of total capital on any given trade - ie: entry price - stop price = risk per share (RPS). Now divide 2% of total capital by RPS to figure in max. entry size.
6% rule means that you should limit your "exposure" to 6% of total porfolio. IE if you were stopped out on all trades, you'd only be down 6% of total portfolio. Combined with 2% rule, this allows a max. initial entry of 3 positions, assuming all of them are maxxed out at 2% risk. Now, as your positions go your way, you have more exposure available, since you'll be raising your stops and hence the exposure to the market becomes less, until it becomes "negative" (profit stops). Very interesting theory, I've been applying the 2% rule quite well... but the 6% exposure can be frustrating at times, esp. when market's hot.

Any thoughts?

I like this 6% (max 3 trades) idea and will apply it in my testing.
Can I ask you though....on what principle do you establish entry into the market ?

 

[tireg]

Will Rogers had a good method on establishing entry: "Just buy what is going up. If it don't go up, don't buy it."



But this 2%/6% thing works with all types of strategies from pullbacks/trend following/scalping.. whatever you're using. It's a method of risk management. If you want to look deeper, areas to look at are optimal f, kelly criterion, and other position sizing and max. exposure methods.