1% risk clarification

[ScottColeFTA]

JP Morgan, a banker, had a worth of $41bn. Discussion over, banker win. http://www.celebritynetworth.com/richest-celebrities/j-p-morgan-net-worth/

Acquired his wealth through financing the railroads, U.S. Steel, GE, etc. What does that have to do with trading? How often do banks go under because of bad loans and trades? Pretty much as often as the hedge funds. Given the London Whale trade, the Nick Leeson Barings Bank fiasco and other notable bank trading disasters, I'd say they can be beaten just like any other human being.

On another note, what value are you personally trying to contribute to this forum, or is your goal simply to be like a gnat?

 

[ExperiencedJoe]

Acquired his wealth through financing the railroads, U.S. Steel, GE, etc. What does that have to do with trading? How often do banks go under because of bad loans and trades? Pretty much as often as the hedge funds. Given the London Whale trade, the Nick Leeson Barings Bank fiasco and other notable bank trading disasters, I'd say they can be beaten just like any other human being.

On another note, what value are you personally trying to contribute to this forum, or is your goal simply to be like a gnat?

Banks take the other side of hedge funds. Therefore they have everything to do with trading. I show you a banker who would have been richer than any hedge fund guy and you start calling me names.

My contribution to the forum is to ensure people are able to put up convincing ideas. Unconvincing ones should be eliminated to save everyone time.

 

[packer43064]

My contribution to the forum is to ensure people are able to put up convincing ideas. Unconvincing ones should be eliminated to save everyone time.

Agreed. Unconvincing ideas should be eliminated. Where did I put that gnat poison.

 

[Visaria]

i haven't read any responses here, so apols if what i say is duplicate.

My answer is that it depends on how valuable $5k (or in fact any amount) is to you. If the money is not going to be easy to replace if you lose it, then you have to bet small. OTOH, if the amount is easily replaced (e.g. you have a good paying job or your daddy left you a nice trust fund), then you can bet 10-20% or even more, no problem.

btw, not sure about your assumption that most traders risk 1%-2% of capital...

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.

 

[galvinlee888]

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.

You are correct, you can't trade if you only have 5K account. You will be very lucky if you can get 30% return yearly which means you only make 1.5K, not even enough to pay for your internet and electricity to trade.
Only the snake oil mentor/salesman will tell you that you can make millions form trading 5K account and compound it.

The best way is to "invest" it, put it into indices (SPY or something) and "buy and hold" for 20 to 30 years, and invest along the way when you are more "free money".

 

[ScottColeFTA]

You are correct, you can't trade if you only have 5K account. You will be very lucky if you can get 30% return yearly which means you only make 1.5K, not even enough to pay for your internet and electricity to trade.
Only the snake oil mentor/salesman will tell you that you can make millions form trading 5K account and compound it.

The best way is to "invest" it, put it into indices (SPY or something) and "buy and hold" for 20 to 30 years, and invest along the way when you are more "free money".

Here's my take on the small account issue....you have to sit and wait for the right opportunity to come along.

I think many people get caught up in this mindset that they need to actively trade. If you are going to actively trade, then yes, you must focus heavily on risk management.

But, if your goal is to grow your account quickly, you've got to wait, and you've got to learn how to spot those opportunities. I'm referring to catching a big trend of course, rather than on day trading.

If you have a small account, you have no business day trading, but it doesn't mean you shouldn't trade.

A couple good books to read are "How to Make Money in Stocks" by William O'Neil, and the Nicholas Darvas classic "How I made $2 million in the Stock Market."