Money Management

S

SProbability

Many writers advise that a disciplined trader should risk no more than 2% of their trading capital on any one trade. On the other hand I have read (here on ET) some people opine that that rule is only really applicable to professional traders (read those that trade other people's money).

What do you think? Is 2% too restrictive for a retail trader?

Personally, I think that at 5% you have AT LEAST twenty bites at the cherry b/4 you are wiped out. In reality it will be much more than 20 b/cos if you start with $10K & lose $500 on your first trade, on your next trade you should risk $475 (not $500) & so forth.
 
I never risk more than 1% on a single trade.

Disclaimer: This is my STYLE and OPINION. I'm not a guru, so you can skip my post all together if you'd like.

-FastTrader
 
...here's a stupid opinion which will no doubt be corrected by the more experienced here. The percentage approach is based on risk of ruin. Who the hell trades 'til they're ruined? If you have a mechanical system with fairly robust win/loss ratio, average winner to average loser ratio, and a well-behaved equity curve, this won't happen. You will see through a deteriorating equity curve or an excessively long string of losses that things have changed and it's time to QUIT. From that perspective, I trade with a backtested drawdown to account size ratio of 13%. Horrors! Keep in mind that the REAL risk is to your total net worth, and my play money account is less than 1% of my net worth.
 
Quote from SProbability:


What do you think? Is 2% too restrictive for a retail trader?

Personally, I think that at 5% you have AT LEAST twenty bites at the cherry b/4 you are wiped out. In reality it will be much more than 20 b/cos if you start with $10K & lose $500 on your first trade, on your next trade you should risk $475 (not $500) & so forth.
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Personally, I think 1 or 2% is best, but I wouldn't say 5% is way
too much. But, I definitely wouldn't go over 10%. Here's some good advice from Trader Vic.


"If I were a young speculator with $50,000 to trade in the futures markets. I would take a position of no more than 10% of the total--$5,000--and set exit points to limit potential losses to 10 to 20% of that--a $500 to $1000 loss.

In other words, I would set it up so that my losses were no more than 1 to 2% of the total risk capital.

Upon losing $1000 in the first trade, I would scale back my next opening position to $4000 and limit my losses to somewhere in the $400 to $800 range. And so forth.

On the upside, if I made $2000 on my first trade, I would bank $1000 and increase the opening size of my next position to $6000, in effect reducing my initial capital at risk ($5000) by 20%, while increasing my actual risk capital by the same amount.

That way, even if I lost on my next trade, I would still be up money for the period....Trader Vic--Methods of a Wall Street Master--pg.24

Good Luck!
 
I risk about 1 or 2%, but that is more than just money management (although it is certainly a key factor in my risk management parameters). For me, it is as much psychological, in that I don't worry much as to what happens with any one trade, so my head stays clearer. When I started trading I risked a good deal more (usually to my peril), because I was afraid of not really cashing in on a "great trade." The years have taught me that there are hundreds of great trades out there every day, so it's not like I have to risk much on any one of them, and I'd rather have several uncorrelated trades risking a percent or two than one or two bigger ones. It's a personal style and certainly others disagree, but most of the pros I know adhere pretty closely to those numbers, because they have been proven to work well.
Good trading,
Jessie
 
jessie, right on! I feel the same way. When risk is pre-defined and accepted, it makes it much easier to manage the trade from a psychological point of view.

-FastTrader
 
Quote from hypostomus:

...here's a stupid opinion which will no doubt be corrected by the more experienced here. The percentage approach is based on risk of ruin. Who the hell trades 'til they're ruined? If you have a mechanical system with fairly robust win/loss ratio, average winner to average loser ratio, and a well-behaved equity curve, this won't happen. You will see through a deteriorating equity curve or an excessively long string of losses that things have changed and it's time to QUIT. From that perspective, I trade with a backtested drawdown to account size ratio of 13%. Horrors! Keep in mind that the REAL risk is to your total net worth, and my play money account is less than 1% of my net worth.
More...

Elder alludes to this in his new book. He calls the 2% risk the "sharks" and the cumulative effect of a string of losers the "piranhas." His advice is to stop when the "piranhas" have eaten 6%. This is too conservative for me, but its sage advice.
 
I swing trade the rydex funds and money management has been a big problem to me. I was wondering if anyone has any opinions that could help me on this one.

I've been thinking that it might be a good idea to bet the whole wad into one fund whenever I get a buy signal. At least that way, I will always be in the market. I also think that switching between the us gov bull and bear bond funds might be good options (RYGBX, RYJUX).
regards
peter daniels
 
2 books, one very good, Gallacher "Winner Take All" goes into the difference between 3 trades at 2% risk and one trade at 6%risk.

Another one, poorly written but a little more exhaustive on mm is The Trading Game, written by the author (i forget his name)

Both are well worth reading if you are questioning the 2% rule
 
"At least that way, I will always be in the market."

I wonder why you would always want to be in the market? Being able to be out whenever I want is the single greatest advantage I have now over when I was on the floor making markets. Now, I can simply stand aside and watch when things get crazy. Yes, I miss some trades now and then, but I'd MUCH rather be "out" of a trade and wishing I was "in" than "in" and wishing I was "out".
Jessie
 
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