Risk per Trade compared with Profit per Day

[Purple Brain]

I’m interested in the relationship between risk per trade and profit per day.

My normal risk per trade of 2% is based on what I believe is considered to be a reasonable level of risk for the instruments I’m trading (forex) and my timeframe (15 minute charts). I understand what constitutes positive expectancy and the importance of cutting losers quickly etc.

Recent discussion on here suggests a target of 2% net gains per day are not unreasonable and possibly the norm.

Is there generally such a relatively large amount of risk for the daily reward – do we all typically make more than 1 trade a day and expect to profit only by as much overall as we risk on every single trade?

I appreciate risk management is key, but putting a possible 2% risk on the line for every trade we take every day with the expectation of ending up with just 2% profit overall seems unbalanced. I’m not sure I can remember what I thought it would be or should be when I started out, but I’m almost certain I had an idea of risking a far smaller percentage on any one trade than I would expect to make profits for the day.

Don't get me wrong - I'd kill for a consistent 2% profit per day and any combination of W:L and average win and average loss to achieve that, but I found the realisation (if true and if general) rather sobering.

 

[malaguti]

Recent discussion on here suggests a target of 2% net gains per day are not unreasonable and possibly the norm.

whoever has said that, has been lying. Doesn't that equate to over 700% after 100 days, and thats based on just 5 days a week?

 

[VielGeld]

My preference is to risk .5% on a trade these days, tbh. The 1-3% figure being shown is really just a guideline meant to imply that risk should never be so high that you blow your account. What you need to do is find a reasonable medium where your account keeps growing while minimizing the risk of blowing up. 3% risk or less tends to do the job nicely. You can keep track of your stats with an Excel sheet or online stat keeper if you want to optimize risk per trade for your trading ability.

But that said, I also look for trades that have skewed R:R as well. If the R:R looks good and I got a good entry, then I'll put more on the table.

Honestly though, I'd worry more about my strategy and having an idea what's what before giving risk, etc. a thought. It doesn't matter how low your risk is if you can't trade, eh?

 

[Purple Brain]

It doesn't matter how low your risk is if you can't trade, eh?

Says it all for me, but obviously without revealing any more than you wish to VielGeld, how does that normal level of 0.5% risk per trade equate to your average daily net gain and on average how many trades do you take per day?

I guess where I'm going with this is that we're putting up a nominal X% risk per trade, to work very quickly and very hard in-trade to reduce that risk, so that we achieve an expectancy which will offer us on a net daily basis not a lot more than we nominally risk on each trade, every day.

That's how it seems to me at this stage. Is that perspective in-line with the reality of the more experienced traders on this site?

 

[donaldduke]

If you risk 2% a day, and your expectancy = 0.2 per dollar risked.
You need 5 trades a day to average 2%.

If your expectancy is 0.5, then you 'only' need 2 trades to average 2% a day.

Maintaining 0.5 expectancy on an almost efficient market like FX and getting 2 trades a day (500 a year). Is going to be really difficult, if you can manage that you going to be one of the best FX traders in the world. A system like that is getting close to the holy grail.

In reality if you are going to get multiple signals per day then more likely your expectancy will be much lower than 0.5, maybe even lower than 0.2.

 

[VielGeld]

Says it all for me, but obviously without revealing any more than you wish to VielGeld, how does that normal level of 0.5% risk per trade equate to your average daily net gain and on average how many trades do you take per day?

I'm a swing trader, so I usually average about one trade per week or so. I wouldn't want to claim I'm profitable here since I'm break-even for the year, but I know enough to say what's what.

But as for my risk, I keep it that low to minimize losses. If you have a string of, say, 10 losers, then that comes out to a total loss of about 4.4% as opposed to 16.6% on 2% risk. Since trading could be said to be more about the protection of your capital than achieving outsize rewards, then these results should be self-explanatory.

Though since the topic is about profits, here's how I think about it. My real method for risk management is by finding a very low-risk entry, which allows for a tight stop. Since my stop is tight, I get to use more leverage (nothing excessive, mind you!). And since I let my good trades run for a while, the R:R can be quite nice.

To give you some stats, I'd say I make 3-7% for risking maybe .5-2% at most (on average). Win % is some 62% for the year, as well. I'm break-even because I didn't control my outsize losses, which have been bigger than any of my winners. That's the way it works.

So the answer isn't quite straightforward. It all depends on your strategy, which is why I emphasized that over looking at % risked. Money management is what you do once you have your method, not the other way around.

I'm not quite sure what you mean by this statement, though:

I guess where I'm going with this is that we're putting up a nominal X% risk per trade, to work very quickly and very hard in-trade to reduce that risk, so that we achieve an expectancy which will offer us on a net daily basis not a lot more than we nominally risk on each trade, every day.

Risk is something you assess before the trade because you have an idea what to expect. You size your bet accordingly, then manage from there. At least, that's what I do.

 

[Purple Brain]

If you risk 2% a day, and your expectancy = 0.2 per dollar risked.
You need 5 trades a day to average 2%.

If your expectancy is 0.5, then you 'only' need 2 trades to average 2% a day.

Maintaining 0.5 expectancy on an almost efficient market like FX and getting 2 trades a day (500 a year). Is going to be really difficult, if you can manage that you going to be one of the best FX traders in the world. A system like that is getting close to the holy grail.

In reality if you are going to get multiple signals per day then more likely your expectancy will be much lower than 0.5, maybe even lower than 0.2.

That's likely going to put a lot of new traders off and lower expectations considerably, but I suspect that's precisely what it should be doing. Thanks for the reality check.

 

[Purple Brain]

Though since the topic is about profits, here's how I think about it. My real method for risk management is by finding a very low-risk entry, which allows for a tight stop. Since my stop is tight, I get to use more leverage (nothing excessive, mind you!). And since I let my good trades run for a while, the R:R can be quite nice.

The tools used: cutting losses, low-risk entry = larger position and letting the winners develop a good R:R are obviously key, but I guess I’m just surprised at my level of risk per trade compared with what I can at best hope to make net per day. From what you say, and have said in a prior post, that is more to do with my own current W:L and risk management and average win and average loss statistics rather than a universal condition for traders generally.

To give you some stats, I'd say I make 3-7% for risking maybe .5-2% at most (on average). Win % is some 62% for the year, as well. I'm break-even because I didn't control my outsize losses, which have been bigger than any of my winners. That's the way it works.

I get the picture. A decent W:L (certainly I’d be happy with that) ditto the R:R.

I'm not quite sure what you mean by this statement, though:

Risk is something you assess before the trade because you have an idea what to expect. You size your bet accordingly, then manage from there. At least, that's what I do.

Your post has cleared this issue up for me VielGeld, thanks. Coming from my current situation of risking 2% per trade, taking between 2-10 trades a day and aiming to make a net 2% per day, the prognosis was not positive.

I need to get my methods a lot sharper to produce an expectancy far in excess of that which I currently manage.

 

[VielGeld]

Not much time to post here, so I'll make a quick statement: there is nothing wrong with 1:1 R:R, or whatever. What I described was simply how I've come to trade. There are many ways to manage risk.

If you take more trades, and they're shorter term, chances are your R:R is not going to be much higher than that. In fact, scalpers tend to have high win %, but low R:R. If you let your winners run for a long time, then a 30% win rate may not affect you that much.

Food for thought. :smart:

 

[lucas_king]

I’m interested in the relationship between risk per trade and profit per day.

My normal risk per trade of 2% is based on what I believe is considered to be a reasonable level of risk for the instruments I’m trading (forex) and my timeframe (15 minute charts). I understand what constitutes positive expectancy and the importance of cutting losers quickly etc.

Recent discussion on here suggests a target of 2% net gains per day are not unreasonable and possibly the norm.

Is there generally such a relatively large amount of risk for the daily reward – do we all typically make more than 1 trade a day and expect to profit only by as much overall as we risk on every single trade?

I appreciate risk management is key, but putting a possible 2% risk on the line for every trade we take every day with the expectation of ending up with just 2% profit overall seems unbalanced. I’m not sure I can remember what I thought it would be or should be when I started out, but I’m almost certain I had an idea of risking a far smaller percentage on any one trade than I would expect to make profits for the day.

Don't get me wrong - I'd kill for a consistent 2% profit per day and any combination of W:L and average win and average loss to achieve that, but I found the realisation (if true and if general) rather sobering.

I’m not sure that having a fixed figure (i.e. 2%) is the way to go anyway. Each trade will give different levels by which you will feel better out of the trade and that maybe as little as 1% on one trade but say 5% on another. I think the main thing to look at it the risk reward PER trade. I generally look for opportunities that give me no less that 3:1 profit vs loss, therefore giving me a breakeven of one winning trade for every 3 I get wrong. Sometime this is even higher.

I aim (like most) to make a daily profit but I don’t have a fixed amount in my mind, I take each day as it comes. I have found that by doing this it saves me from trading on dull days where nothing is going on just to make my expected return.

 

[Purple Brain]

I’m not sure that having a fixed figure (i.e. 2%) is the way to go anyway. Each trade will give different levels by which you will feel better out of the trade and that maybe as little as 1% on one trade but say 5% on another. I think the main thing to look at it the risk reward PER trade. I generally look for opportunities that give me no less that 3:1 profit vs loss, therefore giving me a breakeven of one winning trade for every 3 I get wrong. Sometime this is even higher.

I'm nowhere near developing skills to differentiate between a trade that would warrant a lower risk and one that would benefit from having a little more wagered. Look forward to being ale to do that though.

I aim (like most) to make a daily profit but I don’t have a fixed amount in my mind, I take each day as it comes. I have found that by doing this it saves me from trading on dull days where nothing is going on just to make my expected return.

Identifying a dull day ahead of time - another skill to add to the list.

 

[numbertea]

My system has various entries and exits, each with a positive reward expectancy based on backtesting and trading. The risk to reward profile I see has the trading system as a whole being considered and therefore the numbers are not meaningful to me on a trade by trade basis or even day to day. Only overall can I determine my risk to reward ratio. As long as it have profitability overall I don't see the risk reward importance.

Why is risk to reward so important? I trade with 10 percent of my account as the max margin requirement for entering a trade but am considering to up that amount as things give me more confidence. I consider the historical max drawdown amount of my trading as my hard programmed stop loss while trading as my backup emergency out. If the market drops and the SEC locks me out while I'm long then I will be crushed but I trade futures so I would just run and short the underlying if that happened.

What is true risk?

Cheers

 

[ffsear]

Personally I thing that getting into the mindset of "profit per day" or even "profit every day" is a destructive way of thinking for a retail trader. Focus on perfect entries, when ever they come. Having a daily profit target will lead to taking poor trades.