Why only 1% Capital Risk when trading

Gardan

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#16
Trader333 said:
Garden,

The stock was then suspended from trading and when it opened up again it was trading at around $10. This meant that the loss on the trade was immediately (2000 x $60) - (2000 x $10) = 100K. Taking off the $30K account in margin, this person became liable for $70K and they had to sell their house to cover this.
Paul
Thanks Paul, I'll post this in my "Must Read Monthly File"
 
Jul 10, 2003
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#17
Gridiron, your assumption that 1% (or less) of capital risked per trade is quite correct - not the full trade size - just the risk portion.

But Paul's point - absolutely valid- is what is known as a Black Swan event. An event so rare that few factor it's possibility onto their trading plan. And one, when it does happen, often wipe's out the unwary.

There have been systems which suggest taking a position size of no more than $25K, but I would suggest you consider this in relation to your planned operating capital.

By that I mean, if you have a trading capital base of $1M then taking on a position size of $100K (i.e. 10%) would be acceptable (IMV) providing your risk ALWAYS remained within the 1% range.

You will most often find that your capital base will be many times more than you need on a risk basis to balance your risk profile on an outright exposure basis.
 

Gardan

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#18
Thanks Brumble

TheBramble said:
Gridiron, your assumption that 1% (or less) of capital risked per trade is quite correct - not the full trade size - just the risk portion.
By the risk portion you mean, what your stop is, might be?

[QUOTE
But Paul's point - absolutely valid- is what is known as a Black Swan event. An event so rare that few factor it's possibility onto their trading plan. And one, when it does happen, often wipe's out the unwary..[/QUOTE

Are there any other events I should be aware of that might have this devastating affect on a share.If the answer is to long, just say so and I will get your drift.

Even with a stop in place, what affect did 911 have on shares for instance. Did everyone suffer massive slippage?



Cheers Gaducks
 
Jul 10, 2003
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#19
Gardan said:
By the risk portion you mean, what your stop is, might be?
Yes.

Gardan said:
Even with a stop in place, what affect did 911 have on shares for instance. Did everyone suffer massive slippage?
Don't know. I wasn't in the market at that time...if it hadn't been 9/11 it would have been something else...

The point is, you can plan your trading on never having a 9/11 and make mega bucks until it does occur - or factor the possibility of a 9/11 into your trading plan.

The first approach will have you exceeding all your contemporaries' performance - the second will have you staying in the game.... your choice.

BTW Rooney is CRAP...
 
Mar 20, 2004
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#20
Trader333 said:
Garden,
I cannot remember the exact details of the stock name but one of the persons concerned had bought 2000 shares of a stock that was valued at $60 (ish) so having an exposure of $120K with an account of only $30K.

The stock was then suspended from trading and when it opened up again it was trading at around $10. This meant that the loss on the trade was immediately (2000 x $60) - (2000 x $10) = 100K. Taking off the $30K account in margin, this person became liable for $70K and they had to sell their house to cover this.

Paul
Just another excuse to trade Forex! ;)

James
 

Gardan

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#21
TheBramble said:
Yes.

Don't know. I wasn't in the market at that time...if it hadn't been 9/11 it would have been something else...

The point is, you can plan your trading on never having a 9/11 and make mega bucks until it does occur - or factor the possibility of a 9/11 into your trading plan.

The first approach will have you exceeding all your contemporaries' performance - the second will have you staying in the game.... your choice.

BTW Rooney is CRAP...
So is it prudent to factor in say a possible 20% (911) hit on all your open positions or more?
Is anything over 50% getting to the " Time to get in the coal bunker stage"

Re: Rooney, as a Liverpool fan , when we kick are Mancunian Neighbours ar*s'es off the field on Saturday, I hope Fergie plays him in the same position he played last night.
But Please,Please, lets keep to this very important subject.
 
Jul 10, 2003
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#22
Gardan said:
So is it prudent to factor in say a possible 20% (911) hit on all your open positions or more?
Is anything over 50% getting to the " Time to get in the coal bunker stage".
Gradeon, look at it like this.

How many positions would you need to have open at any one time, for a flock of Black Swans to sail into view (as per $60 to $10 example given above) for you to wish your exposure had been lower?

I'm not trying to be deep, but everyone's risk profile and comfort level is different. I never have more than 10% in the market at any one time and my risk per trade is normally WAY less than 1% which is my absolute MAX.

I consider I am VERY risk averse. But I didn't start that way...
 

Gardan

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#25
TheBramble said:
Gradeon, look at it like this.

How many positions would you need to have open at any one time, for a flock of Black Swans to sail into view (as per $60 to $10 example given above) for you to wish your exposure had been lower?

I'm not trying to be deep, but everyone's risk profile and comfort level is different. I never have more than 10% in the market at any one time and my risk per trade is normally WAY less than 1% which is my absolute MAX.
I consider I am VERY risk averse. But I didn't start that way...
Tony,10% of your total unmargined capital? just wish to get any info clear here, free, rather than the expensive fees the Markets charge. Could probably push to a beer.

Black Swans, one would be dreadful, two....oh dear! , get your point.
 

Gardan

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#26
Salty Gibbon said:
Is the risk any less with things like QQQQ and SPY ?
In Keeping with asking stupid questions here, rather than them Lovely Smiling, Friendly Chaps at the Brokers. What are all the Q's and Undercover agents all about?

Gary
 
Aug 25, 2003
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#27
QQQQ is the Nasdaq-100 Trust 1 QQQQ Price: $38.44 -0.14 -0.36% Vol: 62,260,600 2:53 PM ET 1/13/2005

The Fund seeks to provide investment results that generally correspond to the price and yield performance of the component securities of the Nasdaq-100 Index.


SPY is the SPDR Trust;1 SPY Price: $118.51 -0.06 -0.05% Vol: 31,792,400 2:49 PM ET 1/13/2005

The Trust seeks invest results that, before expenses, generally correspond to the price and yield performance of the component common stocks of the S&P 500 Index.
 
Aug 25, 2003
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#28
I'm not trying to be deep, but everyone's risk profile and comfort level is different. I never have more than 10% in the market at any one time and my risk per trade is normally WAY less than 1% which is my absolute MAX.
Unless I have misunderstood you Tony you must either trade exceedingly small size or else you have an enormous trading pot of dosh.
 

Gardan

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#29
Salty Gibbon said:
QQQQ is the Nasdaq-100 Trust 1 QQQQ Price: $38.44 -0.14 -0.36% Vol: 62,260,600 2:53 PM ET 1/13/2005

The Fund seeks to provide investment results that generally correspond to the price and yield performance of the component securities of the Nasdaq-100 Index.


SPY is the SPDR Trust;1 SPY Price: $118.51 -0.06 -0.05% Vol: 31,792,400 2:49 PM ET 1/13/2005

The Trust seeks invest results that, before expenses, generally correspond to the price and yield performance of the component common stocks of the S&P 500 Index.
Thanks Salty thought YOU where going mad there for a moment....Phew!