1% risk clarification

P

packer43064

I'm trying to understand this 1%-2% risk of total capital rule that most traders follow. The way I'm thinking of it can't be correct, unless we all are starting with several hundred thousand to spare. I'll explain why.

Say you have 5k in your unmargined account. 1% of 5k is only $50. What the hell are you going to do with that. Even at 100k were only talking about 1k per trade. This can't be the way people trade.

If not then how do we arrive at 1% of total capital risk? Put 2k on a trade, buy X amount of shares and cut your losses at the 1% mark?

Example:
Buy 2k of stock AB at $20 a share=100 shares.

5k total capital at risk so 1% is $50.

Put your stop loss at $19.50 on stock AB.

Obviously there is slippage and trade costs, but we won't count that to make things easier right now. Is this correct?

If it dropped to $19.50 I would be out only 1% of my 5k total capital at risk. Not including costs of course so really more than 1%.

If that is the case how much do you put in a trade? On a small account like $5000 I would think even 1k or 20% seems like alot.
 
packer43064 said:
The way I'm thinking of it can't be correct, unless we all are starting with several hundred thousand to spare.
More...

It is correct. The fact you don't understand the correctness means you are going to lose. Did you think the market is a lotto that you can start with $1 and win millions ?

If you want to play the market as a lotto, why not just play normal lotto ? Anyway I am just getting my piece in before the positive waves, double your money quick, 10 times your money this time next week crowd floods in to tell you the best moving average to use.
 
Your example is correct. I typically put on about 7-10 positions for diversification, but I would happily put on 5, or 20% per trade, if that gave sufficient diversification or I had good reason to do so.

As an example, I would position size either at 20% of capital or 1% risk, whichever is the lesser. If the stop is far away obviously size is smaller, too far and perhaps not worth it so look elsewhere.
 
ExperiencedJoe said:
It is correct. The fact you don't understand the correctness means you are going to lose. Did you think the market is a lotto that you can start with $1 and win millions ?

If you want to play the market as a lotto, why not just play normal lotto ? Anyway I am just getting my piece in before the positive waves, double your money quick, 10 times your money this time next week crowd floods in to tell you the best moving average to use.
More...

I've read your other posts. Useless information just to rile people up. Thanks....for nothing.
 
justrading said:
Your example is correct. I typically put on about 7-10 positions for diversification, but I would happily put on 5, or 20% per trade, if that gave sufficient diversification or I had good reason to do so.

As an example, I would position size either at 20% of capital or 1% risk, whichever is the lesser. If the stop is far away obviously size is smaller, too far and perhaps not worth it so look elsewhere.
More...

Thank you.
 
ExperiencedJoe said:
It is correct. The fact you don't understand the correctness means you are going to lose. Did you think the market is a lotto that you can start with $1 and win millions ?

If you want to play the market as a lotto, why not just play normal lotto ? Anyway I am just getting my piece in before the positive waves, double your money quick, 10 times your money this time next week crowd floods in to tell you the best moving average to use.
More...
%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%
True;
not that the market is a lotto, but other WISE, good points.
Swing- position traders trading with trend[10+ year chart];
may risk more than 1%, but they get dividends sometimes, less commissions most of time, use ETFs,ETNs _ invest short term/long term[200dma, 50 dma like IBD notes].LOL; double your money OK; but the faster you do that, the more risk.
 
packer43064 said:
I'm trying to understand this 1%-2% risk of total capital rule that most traders follow. The way I'm thinking of it can't be correct, unless we all are starting with several hundred thousand to spare. I'll explain why.

Say you have 5k in your unmargined account. 1% of 5k is only $50. What the hell are you going to do with that. Even at 100k were only talking about 1k per trade. This can't be the way people trade.

If not then how do we arrive at 1% of total capital risk? Put 2k on a trade, buy X amount of shares and cut your losses at the 1% mark?

Example:
Buy 2k of stock AB at $20 a share=100 shares.

5k total capital at risk so 1% is $50.

Put your stop loss at $19.50 on stock AB.

Obviously there is slippage and trade costs, but we won't count that to make things easier right now. Is this correct?

If it dropped to $19.50 I would be out only 1% of my 5k total capital at risk. Not including costs of course so really more than 1%.

If that is the case how much do you put in a trade? On a small account like $5000 I would think even 1k or 20% seems like alot.
More...

With only $5,000 to trade, you have no business trading.
packer43064 said:
I'm trying to understand this 1%-2% risk of total capital rule that most traders follow. The way I'm thinking of it can't be correct, unless we all are starting with several hundred thousand to spare. I'll explain why.

Say you have 5k in your unmargined account. 1% of 5k is only $50. What the hell are you going to do with that. Even at 100k were only talking about 1k per trade. This can't be the way people trade.

If not then how do we arrive at 1% of total capital risk? Put 2k on a trade, buy X amount of shares and cut your losses at the 1% mark?

Example:
Buy 2k of stock AB at $20 a share=100 shares.

5k total capital at risk so 1% is $50.

Put your stop loss at $19.50 on stock AB.

Obviously there is slippage and trade costs, but we won't count that to make things easier right now. Is this correct?

If it dropped to $19.50 I would be out only 1% of my 5k total capital at risk. Not including costs of course so really more than 1%.

If that is the case how much do you put in a trade? On a small account like $5000 I would think even 1k or 20% seems like alot.
More...

The amount one should risk per trade is dependent upon a few factors:

1. The expectation per trade of the strategy being traded
2. The desired rate of return
3. The trader's tolerance for risk

The only way to really figure out how much to risk is to do some rigorous testing of the strategy you intend to implement. You need to find out what percentage of winners you will likely have, the ratio of dollars per win to dollars per loss, the average losing streak and the worst losing streak.

Once you you can figure this out, you can crank up the numbers to see how much of a drawdown will go with the desired rate of return. For instance, can you tolerate a 50% worst drawdown in exchange for a 25% compound annual return? The typical trend following commodity trading advisor is willing to accept that type of ratio.

The 1-2% rule is a typical risk per trade suggested by some people familiar with the Turtle trading system in the futures markets. That level of risk was reasonable back in the 1980's when the system was originally taught, but not generally applicable now since the system has deteriorated. Many people who don't really know much about trading then just spout off that rule because they heard it from someone else.
 
After rigorous testing, the OP is likely to have 500 left from the 5000. At that point, going all in with 100% risk is the probably the best option. Unless of course people believe past candle patterns will repeat because the bank on the other side of the retail trade will in some way be magically compelled by those candle patterns to lose their money. Or perhaps the belief is: bank, what bank ? I don't need no stinking bank, I have liquidity provider.
 
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