How much should I risk per trade?

N

nwoptions

Hi guys, I'm a relatively new trader. I've read in trading books (eg Market Wizards) that a trader should risk about 1% of his capital on any one trade.

But I've also read in William O'neil's books that you could risk more than that.

Here's an excerpt from an IBD article on position sizing:

"O'Neil suggests investors with portfolios of $20,000 to $200,000 limit themselves to four or five carefully chosen stocks that they know and understand. Portfolios of between $5,000 and $20,000 might need just three stocks. If you are just dipping a toe with a portfolio of $5,000 or less, narrow your watch list down to the two best stocks you can find that are in actionable chart positions."

If I have a $5000 in capital and I buy 2 stocks. Am I risking 50% per trade? Isn't that way too much?

Thanks
 
nwoptions said:
Hi guys, I'm a relatively new trader. I've read in trading books (eg Market Wizards) that a trader should risk about 1% of his capital on any one trade.

But I've also read in William O'neil's books that you could risk more than that.

Here's an excerpt from an IBD article on position sizing:

"O'Neil suggests investors with portfolios of $20,000 to $200,000 limit themselves to four or five carefully chosen stocks that they know and understand. Portfolios of between $5,000 and $20,000 might need just three stocks. If you are just dipping a toe with a portfolio of $5,000 or less, narrow your watch list down to the two best stocks you can find that are in actionable chart positions."

If I have a $5000 in capital and I buy 2 stocks. Am I risking 50% per trade? Isn't that way too much?

Thanks
More...
1% is for traders, intraday etc. Oneil has investors in mind.

nwoptions said:
If I have a $5000 in capital and I buy 2 stocks. Am I risking 50% per trade? Isn't that way too much?
More...
You risk 50% if it felt by 50% and there's $2500 remaining out of initial size.

You're confusing position sizing/allocation with risk per trade/risk management.

Say you got 5 positions - $1000 each.
If you apply 1% , then if any of those falls by $10 - you close.

Focus on learning how to find a good buy, so you never need to close it / you close it when you want, not when the market(correction) or broker(margin call) says so.
 
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nwoptions said:
Hi guys, I'm a relatively new trader. I've read in trading books (eg Market Wizards) that a trader should risk about 1% of his capital on any one trade.

But I've also read in William O'neil's books that you could risk more than that.

Here's an excerpt from an IBD article on position sizing:

"O'Neil suggests investors with portfolios of $20,000 to $200,000 limit themselves to four or five carefully chosen stocks that they know and understand. Portfolios of between $5,000 and $20,000 might need just three stocks. If you are just dipping a toe with a portfolio of $5,000 or less, narrow your watch list down to the two best stocks you can find that are in actionable chart positions."

If I have a $5000 in capital and I buy 2 stocks. Am I risking 50% per trade? Isn't that way too much?

Thanks
More...

Depends on how much you have as trading capital. If you are like Warren Buffett, a lot. If you are like the rest of us, 5% to be ideal, 10% the absolute max. And that is how much you are going to lose, on ALL positions in aggregate, not on one position.
 
lindq said:
Buy the SPY. Sell it in 30 years.

Treat yourself to a frappucino as a reward for good behavior.
More...

Just a frappucino?? for appreciation in SPY in 30 years?? :wtf::wtf: That would not be big enough of an incentive for good behaviour. :D
 
Risking 1 or 2% in trading means that you will exit your trade when the value of your position has dropped 1 or 2% of your trading capital.

If you have $20,000 in trading capital; 1% is $200.

O'Neil suggests cutting losses if a stock drops 7 or 8%. With a position of $5000 a 8% loss would be $400 or 2% of your $20,000 Capital.

Hope that helps explain it.
 
You should risk no more than you will be comfortable with risking! Perhaps not very helpful, but may be correct. ;-)
(Investing VS Trading should involve different risk profiles)
 
nwoptions said:
Hi guys, I'm a relatively new trader. I've read in trading books (eg Market Wizards) that a trader should risk about 1% of his capital on any one trade.

But I've also read in William O'neil's books that you could risk more than that.

Here's an excerpt from an IBD article on position sizing:

"O'Neil suggests investors with portfolios of $20,000 to $200,000 limit themselves to four or five carefully chosen stocks that they know and understand. Portfolios of between $5,000 and $20,000 might need just three stocks. If you are just dipping a toe with a portfolio of $5,000 or less, narrow your watch list down to the two best stocks you can find that are in actionable chart positions."

If I have a $5000 in capital and I buy 2 stocks. Am I risking 50% per trade? Isn't that way too much?

Thanks
More...

it depends on your tolerance for risk which in turn is dependent on saveral factors.
It depends on your source of alpha.
 
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