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How much shold one risk in a single trade?
- Thread starter epetrov
- Start date
Another answer: if you are a deep value investor, risk nothing. Only buy when the valuation is so cheap, and the finances sufficiently sound, that you almost can't lose money, short of WWIII or a meteorite wiping out the corporate HQ.
Value investing is the only technique I am aware of where the lower the risk, the higher the return. So you should always aim for "virtually zero" risk on a value investment.
Value investing is the only technique I am aware of where the lower the risk, the higher the return. So you should always aim for "virtually zero" risk on a value investment.
Quote from peilthetraveler:
So you people that risk less than 1% in a single trade, does that mean that you are consistantly in 100-200 positions to maximize your account. And if so, how do you pick your stocks? Are you just throwing darts at a newspaper, letting the losers hit the stops and the winners run all day?
Well, risk is also at the portfolio level. A 1% risk on 100 highly correlated positions, such as 100 long stock positions, is similar to a 50-90% risk on one single position.
If you are risking 1% per trade and making say 3 times your risk on profitable positions, you only need about 10 trades a year to get a decent return. So in any given month you might only have 2-3 positions on. And 20% of the positions generate 80% of the returns, so you want to be risking more like 2-3% and occasionally more (e.g. 5%) on the very best positions you have in a given year.
It might look like this:
Top position: risk 3%, make 15% if right.
2nd position: risk 2%, make 8% if right
Positions 3-5: risk 1% each, make 3% each if right
Positions 6-10: risk 0.5%, make 1.5% each if right
Let's say your top two positions are winners, 2/3 of your 3-5 positions are winners, and half your 6-10 positions are winners. You just made 30% for the year.
Let's say ALL your trades are losers. You are down 10.5% on the year and live to fight another day.
If you are somewhere in between then you might make 10-20%.
N.B. the risk is not the outright dollar value of the position, but the equity you will lose if the market hits your stop. Risk 1% doesn't mean only invest 1% in the market. It could mean invest 25% and place a stop 4% away from the current price.