Daily Risk Rule
- Thread starter ps0013
- Start date
Robert Morse
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These metrics do not apply to all. You will have to develop what works for you based on your strategy and comfort level.
Much depends on how correlated your positions are. If all 10 2% positions are breweries located in the US mid-west, that's just like one big 20% position on the mid-west brewing sector.
But if you are long one US mid-west brewery, a tech stock, a pharma, a manufacturer, an oil producer, a fashion retailer, etc. etc. the specific correlations are much reduced.
BUT - this does not make your portfolio fire-proof - when the investment sector as a whole decides its less risky to be in bonds than in stocks market, its common that all stocks fall at the same time.
But if you are long one US mid-west brewery, a tech stock, a pharma, a manufacturer, an oil producer, a fashion retailer, etc. etc. the specific correlations are much reduced.
BUT - this does not make your portfolio fire-proof - when the investment sector as a whole decides its less risky to be in bonds than in stocks market, its common that all stocks fall at the same time.
If you have 10 open trades and each is putting 2% of your account at risk, then you have 20% of your account at risk for the day. Fine if they are well diversified across a number of markets, and there for a good reason. But bad if they are not.
The positive side of having that kind of high correlation is that now, hedging your portfolio with VIX (or SPX products) becomes more effective. So, a double benefit for doing the right thing.
Personal preference really. Diversification is important and generally you should keep 50-60% of your account in cash to handle margin calls and drawdown.
I generally limit myself only on maximum loss per month. If my loss exceeds 10% of my total account value I back out for around a month as a cool-off and study period. I don't really limit myself to how much I have out at a given time, assuming it is diversified and relatively liquid. Of course, I keep majority (around 60%) of my account in liquid cash. This is a throwback to my poker playing days - you always want to keep "re-buy" cash on hand and limit your total table loss by percentage to avoid tilt.
gaussian, do you trade for a living? Backing out for a month sounds like it would be almost impossible if you were trying to generate income
No, but there are plenty of traders that are professionals and many prop shop risk teams that enforce the same rule. If backing out a month kills you, you have real cash flow problems trading more won't solve.
Agree with R Morse, this is an individual thing based on trader.
I don't have a daily risk rule. I just take every valid trade, no matter how good or bad the day/week/month is going. I used to dwell on it as I've read tradescience to stop trading for X amount of time if you lose X amount of trades.
I've experienced (and will continue to experience) agonizing days where every trade is a loser. It's maddening in the moment. But looking over my records, it's worked well for me to take em' all. Good days have exceeded and outnumbered bad days.
Note: I'm all-in / all-out, 1 trade at a time. No experience balancing multiple positions at time. YMMV.
I don't have a daily risk rule. I just take every valid trade, no matter how good or bad the day/week/month is going. I used to dwell on it as I've read tradescience to stop trading for X amount of time if you lose X amount of trades.
I've experienced (and will continue to experience) agonizing days where every trade is a loser. It's maddening in the moment. But looking over my records, it's worked well for me to take em' all. Good days have exceeded and outnumbered bad days.
Note: I'm all-in / all-out, 1 trade at a time. No experience balancing multiple positions at time. YMMV.