Position sizing question

O

og5

Often on this forum I see that guys suggest not risking any more than 1% of account size on a trade. This figure seems far too conservative to me. Ok, I understand that trading so small has psychological advantages as well as minimal risk for busting an account, but how are you going to make money? Lets say I had $50,000 to start (which is actually 5 times what I have) 1% of that would be $500 a position. I can't give numbers for a daytrader, but a swing trader would have to do 20 10% gains and no loses each month to make a "decent" 2% a month. I must be missing something because trading on 1 or even 2 percent of one's account sounds like a waste of time. Why not 5-7% on a trade?

Comments appreciated.
 
ahem...your maths is abit off

simple example:
500$ risk , 2:1 Risk reward. 50% Hit ratio.
For each 500$ risked you gain 1000$.
20 trades , 10 Losers and 10 winners.
I'll leave the rest of the math to you.

Using say 7% , 3 losers in a row and you have 20% drawdown.
Some mistakes more and you have 50% drawdown.......then what the heck lets go all in to make it back......

Edit: aah might be that you misunderstand, it is not 1% of shares of total equity. It is the dollar risked. So if a stock is at 50$
you do not buy 10 shares to get to 500$ risk.
You determine where your stop are and buy the number of shares accordingly. Say stop 2% away. That is 1 point on a 50$ stock, 500$ Risk, you buy 500 shares. If goes down 1 point you have 500 shares, you exit at 49 and lost 500$.
 
Quote from og5:

Often on this forum I see that guys suggest not risking any more than 1% of account size on a trade. This figure seems far too conservative to me. Ok, I understand that trading so small has psychological advantages as well as minimal risk for busting an account, but how are you going to make money? Lets say I had $50,000 to start (which is actually 5 times what I have) 1% of that would be $500 a position. I can't give numbers for a daytrader, but a swing trader would have to do 20 10% gains and no loses each month to make a "decent" 2% a month. I must be missing something because trading on 1 or even 2 percent of one's account sounds like a waste of time. Why not 5-7% on a trade?

Comments appreciated.
More...

You're mistakenly assuming that RISK and POSITION SIZE are the same. This is not what is usually intended.

To say that you have a 1% risk means, generally, that whatever your position size is, you will close it when it goes against you more than 1% of your total equity. So for example you open a position of 10% your equity, 5k in your example above: if you set your risk to 1% you will close it if and when you've lost $500.

GS
 
If you use a method with a profit factor of 1.5, risk 1% per-trade, and do 20 trades per-month, the average uncompounded return is 10% per-month.
 
Quote from inCom:

You're mistakenly assuming that RISK and POSITION SIZE are the same. This is not what is usually intended.
More...

Ok makes sense now, thanks
 
You must log in or register to reply here.
Back
Top