How did the 3.2% figure come about?
Money Management
- Thread starter SProbability
- Start date
How did the 3.2% figure come about?
As a general rule, your trading systems should be able to survive about 8 consecutive losses, or 8 accumulated losses.
Given that most traders work to a maximum drawdown of 25% on equity, 3% to 3.2% is about the max you can risk on a trade.
Remember if you lose 25% you have to make back 34% to be back at your original equity size.
34% is about a year's gains for a decent trader, and who would want a 12 month non profit period. That's why your max DD should never exceed 25%.
If you lost 5% 19 times straight, you'd be trading with 5% of your original capital so it you would need a 1900% return on capital to just to get back to your orignial stake. Good Luck!
Anyone that is prepared to risk more than 25% of their trading capital is an idiot, trying to convince himself otherwise.
Runningbear
Given that most traders work to a maximum drawdown of 25% on equity, 3% to 3.2% is about the max you can risk on a trade.
Remember if you lose 25% you have to make back 34% to be back at your original equity size.
34% is about a year's gains for a decent trader, and who would want a 12 month non profit period. That's why your max DD should never exceed 25%.
If you lost 5% 19 times straight, you'd be trading with 5% of your original capital so it you would need a 1900% return on capital to just to get back to your orignial stake. Good Luck!
Anyone that is prepared to risk more than 25% of their trading capital is an idiot, trying to convince himself otherwise.
Runningbear
SProbability,
Trust me, most people that have gone broke have done so risking 5% per trade.
Runningbear
By the way, here's an interesting excerpt from the book "Street Smarts" by Linda Raschke. It basically says that a very good indication of what makes a trader succesful, is how soon they recover from their worse drawdown. Which definately has to do with money management, and risking a small amount of your money on each trade.
Loukas
PS:
By the way, this is one of the best books I've read on trading. Its price is steep, but it's worth EVERY CENT!
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From the book "Street Smarts", by LBR and LC
A question that is often asked by anyone aspiring to be a trader is: What makes a trader successful?
.
.
The lesson from these results is clear: successful traders have a larger edge and much better money management than unsuccessful traders.
.
.
If 1 had to explain success with only one variable, the one that predicted success or failure most accurately was the amount of time a program spent recovering from its worst drawdown as a percentage of its life.
Two of the most important components of successful trading are the edge of a system and sound money management. This study confirms this notion. Successful traders have a larger edge and better money management than unsuccessful traders. Unlike popular belief however, this study shows that the smaller edge of unsuccessful traders is not the cause of their failure. Traders failure can be explained almost exclusively by their poor money management practices.
Loukas
PS:
By the way, this is one of the best books I've read on trading. Its price is steep, but it's worth EVERY CENT!
------------------------------
From the book "Street Smarts", by LBR and LC
A question that is often asked by anyone aspiring to be a trader is: What makes a trader successful?
.
.
The lesson from these results is clear: successful traders have a larger edge and much better money management than unsuccessful traders.
.
.
If 1 had to explain success with only one variable, the one that predicted success or failure most accurately was the amount of time a program spent recovering from its worst drawdown as a percentage of its life.
Two of the most important components of successful trading are the edge of a system and sound money management. This study confirms this notion. Successful traders have a larger edge and better money management than unsuccessful traders. Unlike popular belief however, this study shows that the smaller edge of unsuccessful traders is not the cause of their failure. Traders failure can be explained almost exclusively by their poor money management practices.
Do you mind going into more detail?
Many thanks.