Risking 1% of your total equity. Does this refer to the stop?

[achilles28]

Agree. I risk around 0.50% per trade

 

[Cuddles]

I'm feeling comfortable risking ~6.5-8% loss on a trade (where I set my stop). If more volatile and I feel it's likely a bullish trend I'll open that gap, if volatile+bullish but I don't know enough about the instrument I'll narrow the gap (3-4%). I'm talking about the buy price percentage here (just realized people are talking about the total invested capital %).

 

[trickshot]

Question: If you put a stop loss at 1% won't you be stopped quite frequently? Let's say you start with a $1K account (i.e., small retail traders) you buy XYZ at $100 per share or 10 shares, I would be stopped out if XYZ is down $1 dollar? Actually since my round trip cost is $18 commissions, I would easily be down 3% even with a 1% stop and my chance of been stopped is very high?

Appreciate your comments.

1k trading account = undercapitalised. This is why undercapitalised traders blow up all the time, they are forced to risk a very large % of their account regardless of what they trade. Edge only matters in the long run, one can have positive expectancy and still suffer a string of losses in the short run, this is why risk management/position sizing are crucial to long term success.

 

[Humpy]

Interesting comments above.
Does anyone attempt averaging down on losing trades ? And by what factors ?
The great thing about the Forex market is that none of the major currencies are likely to go bust.

 

[HobbyTrading]

I'm taking a trading class at a local university, and I'm confused about a very basic point.
In class, we learned that position sizing is a major part of success in this business. The instructor suggested risking 1% of your equity on each trade as a beginning position sizing method.

I am hoping for you that your instructor made this statement only because (s)he did not yet explain risk management. And hope that a lot of time will be spent on explaining risk management concepts and how to determine your position sizing based on such risk management analysis. Once risk management has been properly explained will you understand why the mentioned 1% is just an example.

 

[Visaria]

The great thing about the Forex market is that none of the major currencies are likely to go bust.

The Swiss franc debacle busted more than a few people, regardless of stops.

 

[Visaria]

Risk taken should vary MASSIVELY depending on the position, your confidence in the trade etc. I tend to bet 0.1% of my account but have gone up to 20% on occasion (e.g. brexit and trump election last year are good examples).

The best trader in the world explains how to do it:

 

[Humpy]

George Soros made off with a lot of UK money some years ago. I don't blame him so much but I do blame the stupid Bank of England/Chancellor at that time for not managing the situation properly.

 

[MrScalper]

I'm taking a trading class at a local university, and I'm confused about a very basic point.

In class, we learned that position sizing is a major part of success in this business. The instructor suggested risking 1% of your equity on each trade as a beginning position sizing method.

Does this mean to set your stop so that any potential loss is that 1% figure, or does this mean to only spend 1% on any purchase?

For example, if I have $100,000 in my trading account, does this rule mean that I can only buy $1000 of stock on each trade? Or does it mean I can buy $100,000 of stock, but set my stop to limit losses to $1000?

On one hand, I know that prices can blow through stops, and give you a might larger loss than 1%. On the other hand, if this refers to total purchase size, if I was buying Chevron stock at $100 a share, I will only be able to afford 10 shares to stay within 1%. A $1.00 move in the price of the stock would only offer up a $10 profit. Considering my brokerage charges $9 in and $9 out, I'd be behind by $8.

Thanks

Have not read the other replies, but my answer is No.

The 1% is your max loss per trade.

Your stop should always be determined by what is actually happening right now.

If your trades are buy and hold, then your stop has to be wider, obviously, to allow for intraday moves.

A tip if you want to pursue?

Look at "averages"!

 

[Xela]

I do blame the stupid Bank of England/Chancellor at that time for not managing the situation properly.

I hear you there ... but my feeling is that to a large extent it was actually the Prime Minister's fault, and whoever had happened to be Chancellor, at the time, would have had much the same problem. (The accounts in Lamont's memoirs of his simply being "unable to get hold of Major" at the time are absolutely hair-raising reading.)