How much to risk on each trade?

I

I'mbatman

Hi,

Total newbie.

I keep seeing mentioned that in any given trade, you should not risk more than 2-3% of the account on the trade.

Does this mean 2-3% should be protected with a stop or that if you have X total each trade should only be using 2-3% dollars?


For instance, you have $20,000. Do you use all 20K to buy XYZ and protect it with a stop 2-3% below entry, or only use 400-600(2-3% of 20000K) per trade?

This is all assuming no margin.

Thanks
IB
 
thats how its done with a volatility based method - stdev, atr.. etc are common types of volatility based stops.

for a volatile biotech, you might only have 1% of your capital allocated... versus say 10% for microsoft...
 
You need to study portfolio allocation. I recommend Ralph Vince. Although you don't want to use the original optimal-f as written, his book Portfolio Management Formulas is an excellent introduction to the mathematics of risk and optimal portfolio growth.

A bit of reading is preferable to picking a random, conservative-sounding number.
 
He doesnt need to do any of that shit. What he needs to do is sit down for the next 3 days and come up with a business plan and stick to his own trading rules that suit his style and behavior of trading.

Offering any sort of advice on "how much to risk" is just a complete waste of time.
 
Quote from I'mbatman:

For instance, you have $20,000. Do you use all 20K to buy XYZ and protect it with a stop 2-3% below entry, or only use 400-600(2-3% of 20000K) per trade?
More...

First, the maximum position size is calculated based on the percentage you want to risk per trade. Then, the allowable position size is calculated basef on the bankroll. You use the smallestof the two. For the formulas and examples read this paper.

IMO do not even think of using optimal methods before you understand the simple fixed percent method.
 
I'mbatman,

You need to first discern what you are doing any of this for. To arbitrarily pick a percentage is to flounder -- it defaults to meaning you are in this to make as much as you can, within the constraint of not losing more than x% per trade (is THAT what you are really in this for? Are you sure that trading what you plan on trading, the way you plan on trading it, is the correct and best way to acheive this?). To believe that your risk is contained by that, is delusional and dangerous.

What are you doing this for? Do you want to stay within a certain drawdown constraint? Is there a time horizon on what you are attempting to do? Do you want to maximize the probability that you will exceed a certain return? Do you want to simply maximize gain? Most people are in this primarily for the rush -- just my own observations over the years.

Until you know what you are doing this for -- what you want to achieve, and what you are willing to tolerate, there's not point in discussing any kind of risk management strategy. There are those who will differ with my saying this, but your risk management strategy dictates everything -- not whether you are right or wrong on the next trade, the next X trades, or even if you have a winning (or losing) approach to the markets. All of these considerations are subordinate to your risk management strategy.

And to obtain that, you need to define what you are in this for, and what you are willing to go through to get there.

And to do THAT, you need to define what constitutes obtaining that, and what constitutes risk, to you.

Absent that, there's no direction to the discussion. Again, just myh opinion.

(What is NOT my opinion, however, but rather is Mathematical FACT, is that the Kelly Criterion will not give you the growth optimal fraction to allocate in trading. Keep away from it -- it is not what most people think it is. In fact, it isn't even what Kelly thought it was.)
 
You should risk an amount such that your worst career drawdown will not impair your ability to continue trading.

Don't risk something based on your risk tolerance. You have no clue what your risk tolerance is until a major drawdown actually occurs.

A good rule of thumb is that your worst drawdown will be at least twice what you plan for, and that your tolerance for risk is half what you think it is. I.e. if your models tell you to expect a 20% drawdown maximum, and you think you can handle that, then expect a 40% drawdown and figure you will be puking your guts once it hits the 20% mark. Actually I think most traders should use even bigger multiples and fractions, but no one will listen to that, so doubling drawdown assumptions and halving risk tolerance assumptions should at least drastically reduce your chance of blowup and extends your survivability.
 
Quote from I'mbatman:

Hi,

Total newbie.

I keep seeing mentioned that in any given trade, you should not risk more than 2-3% of the account on the trade.

Does this mean 2-3% should be protected with a stop or that if you have X total each trade should only be using 2-3% dollars?


For instance, you have $20,000. Do you use all 20K to buy XYZ and protect it with a stop 2-3% below entry, or only use 400-600(2-3% of 20000K) per trade?

This is all assuming no margin.

Thanks
IB
More...

Did you notice you got a bunch of replies but no one really addressed your question? Get used to that if you stay on this forum.

The 2% of your account thing means total loss to your account size per trade.

So if your account size is $20,000, like in your example, whatever position size you take, your stop loss should be at a $400 loss.

So if you use the entire $20,000, your stop loss would be 2% ($400).

If you took a $10,000 position, your stop loss would be 4% of that position (which would be $400 total, which is still 2% of your account).

If you took a $5,000 position, your stop loss would be 8% of that position ($400, which is still 2% of your account).

Do you understand?

So the next thing you need to work on is figuring out how big of a position size to take.
 
Here's some advice from Mom (remember, mother is the inventor of necessity):

1) Determine a max daily loss and honor it no matter what. Mine is $500 on a $50K trading account (though I may modify that if I start trading oil in the live account). If I've blown $500 and the day's not even over, it means either a) I'm not patiently waiting for my best setups, b) I'm chasing entry too far past the price where the trade was signaled, c) I'm revenge trading or overtrading, d) I'm trading too large, e) I was trapped in trading halt that moved against me when trading resumed, f) I suffered huge slippage when news/rumors moved price rapidly against my position and blew through my stop, or g) I made serious order entry errors that only became apparent later on. No matter which of these reasons resulted in the loss, the size of the loss places me in a state of mind that is very poor for successful trading and I call it a day. I can easily recover from a $500 loss when my mind is fresh. Not so easy once the loss becomes larger.

2) Trade with the trend, play breakouts with very tight stops (they work well quickly or they fail and reverse), counter-trend trade ONLY when a reversal signal is put in (lower high or higher low).

3) The less room you allow for losses, the more honed your trading skills will become. If you trade 200 shares of a $100 stock and you only allow a .30 cent move against you, you will learn to choose entries wisely, because you'll get tired of getting stopped and chopped.

4) IF you want to enter a trade early before the entry has been confirmed by the price action (because you're afraid you'll miss a move), or IF you want to average into a position that's running counter to the direction you want price to go because you believe price has gone too high or too low and will definitely reverse: Ask yourself where you would place a disaster stop. What is the level that you're almost certain price will never get to? THAT is the price zone where you should actually look for a reversal signal. Price will get there, I assure you.
 
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