How much shold one risk in a single trade?
- Thread starter epetrov
- Start date
Assuming you are trading your entire risk capital and that is both a reasonable size (100k+) and your sole source of earnings:
For pure trades, I would say most should be in the 0.5-1% range, with riskier trades at 0.1-0.5% and high conviction trades at 1-2.5%. However, on occasion there are exceptional opportunities which would justify a bigger risk. Still, anything beyond about 5% seems way too risky. Still, some traders did it e.g. Cornwall capital bet 20% on a few trades, and scored huge. Keep doing that and eventually you will go broke though.
On the portfolio level, IMO it is best to aim for single-digit drawdowns, and expect occasional drawdowns up to 20% when you make mistakes or the market is surprisingly volatile or difficult.
For investments, it is impossible to hold long-term investments without having quotational risk of at least 50%, so unless you invest no more than 10-20% of your capital, it is compulsory to take double digit quotational risks. The way to manage risk in this case is to realize that quotational risk is not true risk. True investment risk is permanent loss of capital, not temporary market fluctuations. One can buy a stock that has zero debt and is selling for 50% of net quick assets, see the price decline 50% to half of net cash, and double down because the risk is virtually zero. You can't do that with a typical trade, which relies purely on price appreciation for gains, and has no real means of determining objective fundamental valuation floors.
If you have reliable outside income, then you can take more risks. If you have a small account, then to some extent you need to take more risks. You can't run 10k up to 100k by risking $100 per trade, unless you get lucky on some options lottery win.
However, for most people, trading too small is not a problem. I have never met or heard of any trader who failed because they took too little risk. Most beginners fail by taking too much risk (by a factor of 10 or more), and most non-novices fail because they can't trade sufficiently well to generate superior returns. If you can make 20% per annum risking 1% per trade and maximum 10% annual drawdowns, you will not fail because you are too conservative, you will fail because you got greedy and traded 5 times bigger.
Good (scalable) trading skill is, in the long-run, worth almost a huge amount of money, because you can simply employ other people to raise funds and then generate millions or billions in profits. Thus the goal of most traders should be to maximise their trading skill - this requires staying in the game as long as possible via low-risk survival and learning, not gunslinging to try to run up a small account really fast. If your trading interest/skill is non-scalable, usually that means you are a daytrader in which case again, swinging for the fences makes no sense as you have hundreds of chances to apply your edge each month.
For pure trades, I would say most should be in the 0.5-1% range, with riskier trades at 0.1-0.5% and high conviction trades at 1-2.5%. However, on occasion there are exceptional opportunities which would justify a bigger risk. Still, anything beyond about 5% seems way too risky. Still, some traders did it e.g. Cornwall capital bet 20% on a few trades, and scored huge. Keep doing that and eventually you will go broke though.
On the portfolio level, IMO it is best to aim for single-digit drawdowns, and expect occasional drawdowns up to 20% when you make mistakes or the market is surprisingly volatile or difficult.
For investments, it is impossible to hold long-term investments without having quotational risk of at least 50%, so unless you invest no more than 10-20% of your capital, it is compulsory to take double digit quotational risks. The way to manage risk in this case is to realize that quotational risk is not true risk. True investment risk is permanent loss of capital, not temporary market fluctuations. One can buy a stock that has zero debt and is selling for 50% of net quick assets, see the price decline 50% to half of net cash, and double down because the risk is virtually zero. You can't do that with a typical trade, which relies purely on price appreciation for gains, and has no real means of determining objective fundamental valuation floors.
If you have reliable outside income, then you can take more risks. If you have a small account, then to some extent you need to take more risks. You can't run 10k up to 100k by risking $100 per trade, unless you get lucky on some options lottery win.
However, for most people, trading too small is not a problem. I have never met or heard of any trader who failed because they took too little risk. Most beginners fail by taking too much risk (by a factor of 10 or more), and most non-novices fail because they can't trade sufficiently well to generate superior returns. If you can make 20% per annum risking 1% per trade and maximum 10% annual drawdowns, you will not fail because you are too conservative, you will fail because you got greedy and traded 5 times bigger.
Good (scalable) trading skill is, in the long-run, worth almost a huge amount of money, because you can simply employ other people to raise funds and then generate millions or billions in profits. Thus the goal of most traders should be to maximise their trading skill - this requires staying in the game as long as possible via low-risk survival and learning, not gunslinging to try to run up a small account really fast. If your trading interest/skill is non-scalable, usually that means you are a daytrader in which case again, swinging for the fences makes no sense as you have hundreds of chances to apply your edge each month.
Ok here's my opinion on that little gem. Let's say you have 5 great trade setups per year, and 15 reasonable ones. That seems common for a decent medium-term trader or fund, there are normally at least 5 very big trends or reversals per year, and three times as many lesser but still tradable moves. Let's say you risk 2% on the great trades and 0.5% on the others.
Let's say you get 60% of your trades right, 20% neutral/flat, 20% wrong. Let's assume winning trades make 3 times your risk (pretty normal, sometimes they make 5 times or more). This is what you make:
5 great trades, 2% risk on each. 1 loses 2%, 1 is flat, 3 win 6% each. Total return 16%.
15 decent trades avg 15, risk 0.5%. 9 win for 1.5% gains each, 3 break even, 3 lose 0.5% each. Total return is 12%.
16%+12% = 28% per annum. That's risking 0.5% per trade, and 2% on high conviction trades. And due to compounding, you might be more like 30% per annum.
What's your max drawdown this way? Let's say ALL your trades are losers. You lose 7.5% from the normal trades and 10% from the great setups, total 17.5%. And in fact it will be a bit lower due to trading smaller during losing streaks, so let's say 15%.
So your expected return with a 60% win rate and 3:1 risk/reward ratio is 30% per annum, with 15% absolute worst case drawdown in a year, and more likely drawdown in a bad year of half that.
If you can make 30% per annum with single-digit drawdowns, you are going to be rich, as long as you can survive long enough to benefit from compounding.
Thus, the only reason to risk any more than this 0.5-2% level is if i) you don't have long to succeed (terminally ill, very old etc) ii) you have such an amazing trade setup that the chance of losing is low and the payoff gigantic (e.g. Paulson housing bet, dot.com crash etc) iii) you are very greedy/impatient and want to risk failure to get rich a bit quicker.
Lol, dat izz totel bullsh1t... Rishking 2% to see yer account grow bi 6% meens each trade must make 6% * (1/0.02) = 300%.
When waz ze lasht time yer enkountered a "triple bagger"?
Quote from epetrov:
Hello folks,
how much should one risk in a single trade?
Should it be 0,5, 1 or even 2% from the risk capital?
What do you think?
I thing that the market is so unpredictable, that one mustn't risk more that 1%. This should stay between 0,5 and max 1%. Otherwise one can get hurt quite heavily.
So, what do you think?
Epetrov,
First you need to know your expected P&L ratio, your expectancy per trade, etc. Then you need to consider if you're going to put on multiple positions, if you're going to scale-in/out and if you're going to be holding your positions during major economic report releases and overnight. If you're holding overnight, it would help you to take into account the maximum historic gaps (ever, 5 last years, 1 year...).
Then you need to balance the heat you're willing to take and the reward you want to get. With 0,5% risk per trade and a positive expectancy it's highly unlikely that you'll go broke (particularly if you keep your percentage risk constant as the account value fluctuates) but if you have a good edge you may be shortchanging yourself and if you're trading longer timeframes with one single position at a time you're unlikely to make a living trading - barring a multimillion dollar account.
Lol you've never made 3 times your risk on a trade? Poor guy. Many traders refuse to even take a trade unless they expect to make triple their risk.
