Whats your total max risk?

Adecco

Junior member
46 3
What's the most you have at risk at any one moment in time?

I often read that a trader may have max 20% risked at any one time. (e.g. 10 positions with 2% risked)

I'm assuming the logic here is that should some crash hit the market (which, if you trade for a career it inevitably will happen at some point), that you will still have 80% left in your account.

But i'm guessing the above assumes all long positions.

If you employ a rule whereby you have the same number of short as well as long positions then whats teh problem if you risk say 40%? Or more even?
 

Forexmospherian

Legendary member
39,928 3,300
Hi Adecco

Your question is an ideal example of how we should all view Commercial type trading totally different to retail trading - ie they are chalk and cheese

If you had a capital account of millions etc - you might only risk less than 0 05 or 0 1 % on any trade and never expose more than say 0 5% of the capital base - simply because its big money at stake

In retail the advised norm is approx 2% - but no way should you have multi positions open at the same time and leaving you open to losing 20% of your account.

However there are exceptions - as everything connected with trading is not black or white - but so many times grey

For example if i used a $10k capital account and used 2% on a trade - that means I am risking $200 on the trade

If I have a 10 pip stop - $20 a pip or point - if I use 50 pips stops then $4 a pip /point.

Now if I only have a $500 account 2% is just $10 for a trade - but really I might be quite happy to risk 10% on a trade - as its still really only a $100 risk - which is like 1% on $10k account

So for small accounts you can use higher risk - but always be aware even if you have a 70% or more win ratio on 100+ trades - you can still have 5 or even 10 bad trades in a row ( black swan type event )

So if you used 20% on a trade - you could easily wipe all your account out in just a few bad trades - if you are not bothered because its only a few hundred bucks - no problem .

But if you are using a $10k or $30k or even $50k account - no way would you risk losing all your capital in say just 10 bad trades - that would be silly - unless of course you are a multi millionaire just having a few punts - and even then you might question it.

Best thing is if you had 10 trades open risking just 0 2% per trade or 1% - just try and put a stop in profit - so what ever happened you are no longer exposed

You can then end up with 30 trades open - and if all had stops in profit - no extra risk

Hope that explains part of what you have asked

Good Trading


Regards


F
 

0007

Senior member
2,376 660
A total portfolio risk of 20% is commonly quoted -- but nominating this figure (or whatever you think is sensible) is relatively easy. I find the more difficult part is how to calculate it and ensure that you do not exceed it. Common sense says that you will have stops and do your position sizing in accordance with them and your chosen risk on each position held. But the thing you have to watch out for is the Black Swan event e.g. 9/11, and if you are holding shares then the possibility of an individual suspension/crash/takeover/bid -- the effects of which may be different depending whether you are long or short/day trade or longer/& the markets you trade. Among the parameters I consider are the past history of largest % gain/loss in the the relevant index/shares/market etc. The whole business of risk control is very important and at first sight appears to be very simple but in fact it's a bit more complicated than that. Trading is all about probabilities and it is therefore good practice to do Monte Carlo testing to see the likely outcome your chosen risk parameters. It is very easy not to afford risk control the attention it deserves -- LTCM fund is a classic example. I find it important to know at any particular time what my total portfolio risk is with respect to my current holdings -- and even this can only be a best estimate.
 

Adecco

Junior member
46 3
Thanks Guys

But i think you may have misunderstood my query.

Basically - in the event of this black swan event such as 9/11, if you have an equal number of short positions vs long positions on stocks, is that in itself not insurance?
i.e. your stop will be hit on your long positions - but should you not expect to more than make up for it with your short positions?

And if my analysis above is correct then does this not allow the option to have more than 20% risked at anyone time? (on the basis of a disaster you will be more than covered with your short positions anyway)

Is there any major flaw in my above theory?
 
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Forexmospherian

Legendary member
39,928 3,300
i would say that in a major black swan event anything can happen - and therefore there is nothing to stop you positions that you have longs on - falling and then the stocks or positions you have shorts on going up in price - like a "double whammy" situation.

In normal situations "hedging" will work and act as your safeguard - but never say never in trading - plan for the worse case scenario - whilst wish for the best case to happen.

Therefore - I would say yes - there will always be a flaw and nothing is 100% guaranteed - even if it works 80% of the time.
 

0007

Senior member
2,376 660
Thanks Guys

But i think you may have misunderstood my query.

Basically - in the event of this black swan event such as 9/11, if you have an equal number of short positions vs long positions on stocks, is that in itself not insurance?
i.e. your stop will be hit on your long positions - but should you not expect to more than make up for it with your short positions?

And if my analysis above is correct then does this not allow the option to have more than 20% risked at anyone time? (on the basis of a disaster you will be more than covered with your short positions anyway)

Is there any major flaw in my above theory?


Are you assuming that your stops will be effective? What about gaps up/down that go straight through your stops on some positions but not on others? Are you assuming that whatever catastrophic event has just happened in the market will affect your long and short positions equally? Is it reasonable to assume that an everyday sort of "catastrophe" will have the same effect on all your positions?


On the basis of your logic then you could be 100% risk -- obviously not very sensible! So bearing in mind the number of known and unknown parameters that will affect your holdings I would say your proposal needs much further investigation. Gut feeling says that it is flawed but very often in the market gut feelings are not reliable. I think you would have to do some mathematical modelling to test your theory but from what I've read elsewhere the usual opinion is that it wouldn't be effective. After all, if it is a good idea then I'm sure lots of very clever people would already be doing it.


What is good is that you are putting your mind to thinking about these scenarios and that is the way you will make progress. Keep at it!
 

Adecco

Junior member
46 3
i would say that in a major black swan event anything can happen - and therefore there is nothing to stop you positions that you have longs on - falling and then the stocks or positions you have shorts on going up in price - like a "double whammy" situation.

In normal situations "hedging" will work and act as your safeguard - but never say never in trading - plan for the worse case scenario - whilst wish for the best case to happen.

Therefore - I would say yes - there will always be a flaw and nothing is 100% guaranteed - even if it works 80% of the time.

Thanks.

ya - i guess just out of sheer bad luck on any day/week, as you say my long positions may go down and my short positions may rise.
SO not a 9./11 event - but a bit of a black swan nonetheless.

SO out of curiosity - what is your max total risk?
Is 20% generally considered the magic number for retail traders?
 

Forexmospherian

Legendary member
39,928 3,300
Thanks.

ya - i guess just out of sheer bad luck on any day/week, as you say my long positions may go down and my short positions may rise.
SO not a 9./11 event - but a bit of a black swan nonetheless.

SO out of curiosity - what is your max total risk?
Is 20% generally considered the magic number for retail traders?

I only trade Forex - no other instruments - not even gold or oil etc and no stocks

I only intraday trade - but so leave trades on with 30% stake of the original size with stops in profit and then "pyramid and peel" when possible.

This allows me to have the odd 500 or 1000 pip trades - but majority are all under 35 pips.

On my normal account which is over $50k - then I keep to under 1% max per trade with most at 0.3 to 0 8% - I can be in 3 scalps at the same time and my most exposure would be 3% with 90% of the time under 1%.

With trades I leave 30% stake size on after banking 70% - once the stop is in a profit - then its a no stress - no worry - no exposure trade - as worst case scenario is I get stopped out for just a few pips - and best case scenario - it keeps going my way and I move the stops up.

My maximum drawdown - exposure even counting normal losses would be 7 -8% - although I dont pay extra to guarantee my stops - so in a major Black Swan event they could get "gapped" although in 7 yrs of full time trading - so far never had it happened. ( fingers crossed) ;)
 

NVP

Legendary member
37,534 1,988
I'm on holiday at present but this is a great thread and some good comments so dropped in

History is littered with expert traders assuming x and y relationships or correlations and therefore insuring their exposed,positions.......to their cost

Personally I would never ever assume I am protected when taking multiple,positions ........regardless,of experiences as the market(s) are capable of doing anything

Personally being more than 5%-6% in the market with no locked in profits is getting risky for me......that's approx 3-4 trades for me........my limit anyway


N
 

deebee1

Well-known member
379 24
I risk between 3-5% as a maximum risk across my basket of trades. Generally scaling in and out of the market
 

awesomefx

Junior member
22 0
Personally being more than 5%-6% in the market with no locked in profits is getting risky for me......that's approx 3-4 trades for me........my limit anyway
 
 
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