Risk per trade vs. Capital per contract

[lukas]

Which risk management strategy do you think is better?

There are two concepts:
1. we assume $20,000 per contract and always trade the max size calculated this way (e.g. for $100,000 we always trade using 5 lots)
2. we assume 0.2% risk per trade and adjust the clip size depending on the stop level (e.g. for $100,000 we can risk $200 per trade; tick value $10 - if the stop level is 4 ticks we trade 5 lots; 2 ticks - we trade 10 lots).

Strategy 2. has the advantage of potentially creating huge winners but with less certainty. With strategy 1. the risk will vary slightly each time - on one occasion you will use a 2-tick stop, on the other - a 4-tick stop - both trades with the same size, which results in different loss in monetary terms.

 

[Robert Morse]

For myself, I like to compare risk/reward and add expectations. Everyone has a different reason that triggers a trade. You will find that in your strategy, that some "set ups" have a higher expectation than others. I scale my trades to the set ups that have higher expectations and use less capital toward set ups that I determine are "good", but not the "best" set ups. Of course that suggest that you have a valid method of rating your expectations, which might be hard, but part of running trading as a business. I would use a simple 1-5 scale. Anything below 1, you would not consider doing anything.

It is like playing blackjack. When you have a good count, you want to bet more. When you have a low count, bet less. If you use the same trade size with every trade, you will not maximize your earning.

Proper trade allocation is all part of proper risk management.

 

[birzos]

The markets are fluid so No2 is more optimal but 10lots seems excessive given the scenario you provided, No2 with 5lot maximum seems the better option, when you are not sure always take the least aggressive. At 0.2% risk you need to have some serious capital to make a return, why so low, there is no real answer to this as there are too many input factors that determine the level. Confidence, instrument, timeframe, profit ratio, capital, prior profit, prior losses.

 

[fordewind]

For myself, I like to compare risk/reward and add expectations. Everyone has a different reason that triggers a trade. You will find that in your strategy, that some "set ups" have a higher expectation than others. I scale my trades to the set ups that have higher expectations and use less capital toward set ups that I determine are "good", but not the "best" set ups. Of course that suggest that you have a valid method of rating your expectations, which might be hard, but part of running trading as a business. I would use a simple 1-5 scale. Anything below 1, you would not consider doing anything.

It is like playing blackjack. When you have a good count, you want to bet more. When you have a low count, bet less. If you use the same trade size with every trade, you will not maximize your earning.

Proper trade allocation is all part of proper risk management.

Black Jack is good,Craps is better!

 

[lukas]

So, in practical terms - what max size do you think is appropriate for $100,000 capital? It depends on the product traded, but let's say: ES and ZN. I would say 5 ES and 15 ZN.

 

[Robert Morse]

Black Jack is good,Craps is better!

I like craps better too, but you can't turns your odds in your favor. Like buying OTM puts everyday or betting on takeovers. They have a low probability of success and the expected pay out is not likely going to outweigh all the premiums over time.

 

[Xela]

You will find that in your strategy, that some "set ups" have a higher expectation than others. I scale my trades to the set ups that have higher expectations and use less capital toward set ups that I determine are "good", but not the "best" set ups.

This.

I have different set-ups which have different expectancies, and I adjust the position-sizing according to them, with my biggest positions (very highest-expectancy set-ups - which arise comparatively rarely) normally representing a little under 1% of my account, and the others proportionally less, on a pro rata basis according to their net expectancy.

I sometimes add to winning positions, too, but that's always after locking in some profit by stop-loss adjustment, and the total risk-exposure on any individual trade at any time will never be more than the "starting-figure" (and usually less).

Proper trade allocation is all part of proper risk management.

This - exactly so.

 

[Scataphagos]

It [trading] is like playing [counting cards] blackjack. When you have a good count, you want to bet more. When you have a low count, bet less.

My favorite analogy. "Counting cards" is "handicapping the deck"*. Traders should be handicapping the markets when they take risks... regardless of the time frame or the size of gain they are expecting(hoping?) to make.

* Card counting can put the odds of winning in favor of the player at times. Casinos don't like that and kick players out the door when suspected of the practice.

 

[qxr1011]

1. we assume $20,000 per contract and always trade the max size calculated this way (e.g. for $100,000 we always trade using 5 lots)
2. we assume 0.2% risk per trade and adjust the clip size depending on the stop level (e.g. for $100,000 we can risk $200 per trade; tick value $10 - if the stop level is 4 ticks we trade 5 lots; 2 ticks - we trade 10 lots).

both approaches are wrong

correct way to take the risk should be determined by the patterns based on which the method is built

lets say one enters trade at the support in specific chart's period and the stop is set at the close of the bar under that support in this chart's period

the difference between those prices is what one can loose, which is impossible to calculate beforehand (that impossibility adding to one's risk as well)

 

[Handle123]

As strange as this sounds, I check 9 year range of all commodities I trade to figure out how many contracts to trade so it comes out equal cash amounts, so like Crude Oil has $121,220 range and Corn has $27,687.50 range, 121,220 div by 27,687= 4.37, so whatever amount of crude oil I trade, I trade 4.37 more contracts of corn, if they have same risk, but they don't, so that is figured out so risk is same & adds more lots on corn side.