A thought thread..
Maverick in another thread said that a day trader would blow up if he risked more then 2% per day/trade. I'm assuming we agree we were talking about per day. The question one has to ask, is this true? He said if I risk 3% or 3.5% then I'd be certain to blow out. First, we have to think.. will 1% make the difference between returning a good risk/adjusted return versus blowing out? That's a problem right there with the logic.
But there is another problem, the probability isn't factored in. Let's say I have 100k account and trade 1 contract, I set my stop to 3.5% of the account or $3500 and trade the ES. That's a 70 point movement! I'd be trading at 50% of the contract value. Clearly, a trader with any skill isn't likely to "blow out" even risking 3.5% of his account at that degree of leverage. A trader trading 70 contracts with 1 point stop loss would be very likely to lose the 3.5%.
This thought experiment reveals that the RISK AMOUNT has VERY LITTLE to do with the PROBABILITY of LOSS. So what we have to think about is the PROBABILITY of loss and the SIZE of loss.
I've my account set to risk up to around 3% on any single trade (I've thought about setting it anywhere from 2.5% to 5%). My daily loss limit is also approximately the same. My AVERAGE/TYPICAL loss is only about .6% to 1% of my account! Aha, now we get some clarity.
But what if I were to take my worst loss and let's say its 3% and I take 12 MAX loss losers in a row... Let's see how that looks and compares to 2%
Down 36%
Down 24%
There is a difference. But is it the difference between "blowing out" and not ? Nope... Let's find out the max loss run for both estimates assuming a 50% drawdown.
50/3 = 17 losses before taking a 50% loss
50/2 = 25 losses before taking a 50% loss
Okay, so get quite a few more losses with 2% but it isn't night and day. More over, the probability of my taking a max hit loss is probably less then 3% because I manage my risk.
The truth is that if one really wanted to push it and has a viable edge, they can push it safely a lot more then 3%. I have a system that can risk an AVERAGE 10% per trade, real risk, and even after running monte carlo simulations on it the probability of blowing out the account was below 3% for a given year. It might be high for some but I'd be willing to risk it with a small starter account.
Finally, I want to say also that I call the entire direction. You aren't suppose to be able to make anything at what I do. Yet, I go in and win everyday. I win without HFT, without prop edge, etc. I mean, if I make anything its a miracle! Be happy... que the music.
Second, I am concerned about the risk and consider it thoughtfully. I'd like to get my max risk down to below 3% and maybe I will. I don't like the idea of 1 bad day wiping out up to 3 good days of work. It becomes more of a problem as I've increased my leverage/size.
One more thing, I monitor a lot of traders. I've seen a lot of traders come and go. And, I'm just saying that they have in common they used tight stops or they took huge losses. There is some ground between the extremes where I try to survive. One system now I'm monitoring on C2 risk about 1k per trade and trades the ES too. He had a great run and it looked like he was doing a great job. He trades 10 contracts. He had 5 or 6 losers in a row and is down 5k or 6k. What changed? The probability.
Anyway, finally I want to say also that also I no longer have the ego. I am focused on performing at my best. Trust me when an experience trader says risking 3% will blow me out then I stand up and take notice. And, then I think about it and try to work it out. I respectfully disagree but will keep it in mind and try to reduce my risk.
Maverick in another thread said that a day trader would blow up if he risked more then 2% per day/trade. I'm assuming we agree we were talking about per day. The question one has to ask, is this true? He said if I risk 3% or 3.5% then I'd be certain to blow out. First, we have to think.. will 1% make the difference between returning a good risk/adjusted return versus blowing out? That's a problem right there with the logic.
But there is another problem, the probability isn't factored in. Let's say I have 100k account and trade 1 contract, I set my stop to 3.5% of the account or $3500 and trade the ES. That's a 70 point movement! I'd be trading at 50% of the contract value. Clearly, a trader with any skill isn't likely to "blow out" even risking 3.5% of his account at that degree of leverage. A trader trading 70 contracts with 1 point stop loss would be very likely to lose the 3.5%.
This thought experiment reveals that the RISK AMOUNT has VERY LITTLE to do with the PROBABILITY of LOSS. So what we have to think about is the PROBABILITY of loss and the SIZE of loss.
I've my account set to risk up to around 3% on any single trade (I've thought about setting it anywhere from 2.5% to 5%). My daily loss limit is also approximately the same. My AVERAGE/TYPICAL loss is only about .6% to 1% of my account! Aha, now we get some clarity.
But what if I were to take my worst loss and let's say its 3% and I take 12 MAX loss losers in a row... Let's see how that looks and compares to 2%
Down 36%
Down 24%
There is a difference. But is it the difference between "blowing out" and not ? Nope... Let's find out the max loss run for both estimates assuming a 50% drawdown.
50/3 = 17 losses before taking a 50% loss
50/2 = 25 losses before taking a 50% loss
Okay, so get quite a few more losses with 2% but it isn't night and day. More over, the probability of my taking a max hit loss is probably less then 3% because I manage my risk.
The truth is that if one really wanted to push it and has a viable edge, they can push it safely a lot more then 3%. I have a system that can risk an AVERAGE 10% per trade, real risk, and even after running monte carlo simulations on it the probability of blowing out the account was below 3% for a given year. It might be high for some but I'd be willing to risk it with a small starter account.
Finally, I want to say also that I call the entire direction. You aren't suppose to be able to make anything at what I do. Yet, I go in and win everyday. I win without HFT, without prop edge, etc. I mean, if I make anything its a miracle! Be happy... que the music.
Second, I am concerned about the risk and consider it thoughtfully. I'd like to get my max risk down to below 3% and maybe I will. I don't like the idea of 1 bad day wiping out up to 3 good days of work. It becomes more of a problem as I've increased my leverage/size.
One more thing, I monitor a lot of traders. I've seen a lot of traders come and go. And, I'm just saying that they have in common they used tight stops or they took huge losses. There is some ground between the extremes where I try to survive. One system now I'm monitoring on C2 risk about 1k per trade and trades the ES too. He had a great run and it looked like he was doing a great job. He trades 10 contracts. He had 5 or 6 losers in a row and is down 5k or 6k. What changed? The probability.
Anyway, finally I want to say also that also I no longer have the ego. I am focused on performing at my best. Trust me when an experience trader says risking 3% will blow me out then I stand up and take notice. And, then I think about it and try to work it out. I respectfully disagree but will keep it in mind and try to reduce my risk.
