How much risk capital should one use in a single trade?

A couple of points:

1) a stop order is just a market order that is triggered when the price goes to that level. You're not ahead of anyone like you might be with a limit order.

2) Bid offer spreads will increase even in liquid instruments like ES.

3) prices start moving in big increments. Hence slippage on stops.
 
Quote from Visaria:

... 1) a stop order is just a market order that is triggered when the price goes to that level. You're not ahead of anyone like you might be with a limit order...
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Thanks.

Right, I see what you're saying. The fact that the stop order is already working is not the key determinant; instead it's the timimg of when the stop price is triggered, and how that sits relative to the rest of the market orders hitting the market at that time.

Yup, I stand corrected. Thanks.
 
I think the guys above have given a sensible response to your question - though I'm sure it seems harsh in tone.

Predictable? The only predictable factor in my life is my increasing waistline
 
Three elements to this question. 1). What is the expected profit factor of the strategy? 2). How much pain in the form of drawdown are you willing to take? 3). How prepared do you need to be for outlier drawdowns?

In a strategy with a 60% win rate and 1:1 win/loss the profit factor is expected to be 1.50. Over the course of 200 trades you can expect a maximum drawdown at the 90% confidence level of:

.5% risked - 5.5% expected max DD
1% risked - 11% expected max DD
2% risked - 21% expected max DD
3% risked - 30% expected max DD

If you needed a higher level of confidence for risking say 3% at the 99% confidence level the expected max DD goes up to 46%. So there'd be a 1% chance of a 46% dd risking 3% per-trade with a good strategy.

My own observation about max DD pain is that you will exceed your personal number before you realize what your tolerance is. You may think a 20% dd is ok, but when you see it in your account you may feel much different about it.

I know some traders deal with the outlier dd by buying put or call protection to cover the outsized moves.
 
I use a fixed percentage position size corresponding to 2,5% divided by the backtested trade at the 0,04 percentile. That way only one trade in 250 will lose more that 2,5% of my total capital. That is of course provided that the statistics hold up, but the position sizes the formula gives me are pretty close to what I would set manually so I'm happy with this approach.
 
Quote from acrary:

My own observation about max DD pain is that you will exceed your personal number before you realize what your tolerance is. You may think a 20% dd is ok, but when you see it in your account you may feel much different about it.

I know some traders deal with the outlier dd by buying put or call protection to cover the outsized moves. [/B]
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Thanks, Alan. I've come to the conclusion that I need less leverage and buying out of the money options as protection against outlier events. Did you ever encounter a Black Swan type of event in your trading career?
 
Proper risk management is the key to successful market speculation and the longevity of any trader. It is absolutely critical that a trader knows exactly how much they are risking on every single trade they take and the risk should be the exact same for every trade. It's called proper position sizing. The distance from entry to stop loss is the total amount of risk. A trader can then calculate the size of the position they can take.

Generally, risking 1% is a good percentage, with a max of 2% risk per trade.
For example: If a trader has a $100,000 account, risking 1% would allow for a $1,000 loss per trade. If you're taking $1,000 of risk, you should be expecting to make a minimum of $3,000 on the trade. 3:1 reward to risk ratio.

Maxing out the total equity in your account is a recipe for disaster!!
 
Quote from electricshock:

In your case risk 0%

The fact that you've asked such a fucking stupid question implies that you're way out of your depth.

Save the dough for retirement!
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SPOT ON ! Jeezuz and am sure this guy wanted to make it sound so cool like he knew a thing or two and had the balls... (well, to loose it all)
 
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