Risking more than 1%...

[murray t turtle]

Hi all, Market Wizard Larry Hite once recommended risking no more than 1% of a trading account on any one trade.

But a compound calculator doesn't follow this rule. It assumes I reinvest all my profits on the next trade.
Is my risk of ruin really that much higher if I don't follow the 1% rule? Is it suicidal to set my account risk to, say, 100% if my trade risk is 3%?

Thanks

%%
A LOT of it depends on market\
Larry Mint Hite did most leverage futs.
Risk 100% sounds waaaaaay to risky, because you cant for sure limit loss to 3%.
IF you were under 29 or 30 it may work; because if you blew up an account @age 29/ most likely you could recover..................................
AND keeping on risking ''all profits on next trade''; i would not even do that in a trade contest\ but many bow up in the contest for the few big winners.

 

[Businessman]

1% is a good rule of thumb for initial capital.
Once you have booked some profit you could risk a higher percentage.
Lets you start with £100K, risk £1000 or less on your first trade.
When you have some profit, eg you are at 110K, you could risk 1.5% of that if you wanted.
When you have grown to 120K, you could increase risk to 2%.

Above is just an example, you can make up your own risk levels and how to increase, depends on your trading system and style.

You might even want to start by risking only 0.5% of initial capital.

If you only have a small account like $5000 or $10,000 you could start by risking more (eg 5% or more), on the assumption that small account blowup can be more easily replaced by income from your day job.

 

[murray t turtle]

1% is a good rule of thumb for initial capital.
Once you have booked some profit you could risk a higher percentage.
Lets you start with £100K, risk £1000 or less on your first trade.
When you have some profit, eg you are at 110K, you could risk 1.5% of that if you wanted.
When you have grown to 120K, you could increase risk to 2%.

Above is just an example, you can make up your own risk levels and how to increase, depends on your trading system and style.
You might even want to start by risking only 0.5% of initial capital.

If you only have a small account like $5000 or $10,000 you could start by risking more (eg 5% or more), on the assumption that small account blowup can be more easily replaced by income from your day job.

%%
THAT sounds wise;
since he mentioned options/one of Jack Schwager's top traders won an option trading contest\ by not riskin' any more @ all[no increase ,0% increase of trading size].................
I'm not saying to trade options, or use leverage or do like a trading contest/LOL;
but i remember the first time i read that it just strangely stuck with me.
Larry Mint Hite is one of my heroes+ i figure he only blew up an account once. some would say twice, but i figure once/ because he allowed in the contract he may have to ask for some more money, on his market making derivatives business.
And on a cash market/ i never have hear of anyone ,any fund that wanted to stay same size=LOL
Larry mint Hite also got in to some London real estate when he was about 77 or 80

 

[TheDawn]

Trade like the Casino, not the degenerate Gambler.

But Casino's rigged the game against the players to have higher odds of winning though. So are you saying we should hire professional lobbyists to lobby the various government agencies to pass rules and laws that will give us retail traders a higher chance of winning?

 

[TheDawn]

Hi all, Market Wizard Larry Hite once recommended risking no more than 1% of a trading account on any one trade.

But a compound calculator doesn't follow this rule. It assumes I reinvest all my profits on the next trade.

Is my risk of ruin really that much higher if I don't follow the 1% rule? Is it suicidal to set my account risk to, say, 100% if my trade risk is 3%?

Thanks

Define trade risk. Do you mean trade risk being how much the price action will be during the duration of your trade?

I find the 1% rule shouldn't be imposed as an ironclad, written-in-the-stone commandment type of rule but should be more of a guide to help you to manage your trading. It's too bad to deviate from it a little bit, but risking 100% of your trading capital no matter how small the trade risk is to you is suicidal, yes LOL because trade risk can change. It might be 3% when you begin the trade but you never know how much it can balloon to later on. If you don't have the trading capital to absorb it anymore then it could be challenging.

 

[Zwaen]

Depends on the the win rate and expectancy, as well as the trade frequency. I am going to assume exponential bet sizing below:

If you're concluding 1 trade/day or more on a reasonably profitable strategy there's absolutely no need to risk more than 1% of your account to grow the account.

If you're making some really slow trades over several months, a few over the year, then 1%/trade will not be growing your account at a very impressive rate. But then the question is what your return profile is: for instance a profitable strategy with 10% win rate (outsized wins) is going to do much better with smaller bets simply because a losing streak is going to wipe the account (practically, making it too small to allow wins to work for you). On the other hand, a very selective strategy with high win rate and high profitability (not very outsized losses) you can bet far far more if you're willing to deal with the DDs.

What I described was the common sense version. Notice how it depended on the win rate and profit factor. There is a mathematical treatment that you can use: The Kelly criterion: https://en.wikipedia.org/wiki/Kelly_criterion

The Kelly criterion defines a maximum size of the bet that can helpful, any larger probably is going to lose you money you could have made. This bet size is usually far too large, given the fact you don't know the true parameters of future outcomes. But it helps you narrow down what to look for.

An alternative to using Kelly criterion is to simply backtest your past trades and see what would have happened with various bet sizes. Or you can even do something super simple like simulating random outcomes based on your parameters and observe what happens to your simulated equity for various bet sizes. The advantage of such testing is that it lets you reason about this on your own rather than ask people and you're then more likely to understand why.

How do you deal with trade outcomes which are not independent, but have autocorrelation?
Suppose you would simply invest at fixed intervals in an index, can you improve metrics with risk management?

 

[TheDawn]

Risking 1% doesn't mean that you can't put more than 1% in a given trade.
It means that you limit you maximum loss per trade (position) to 1%.
That's what risk management is.

Risking less than 1% can mean both not putting in more than 1% of their trading capital and limiting maximum loss per trade (position) to 1% for some people and/or depending on their trading capital size. For us retail traders, not putting in more than 1% of their trading capital is really stringent but for large funds, 1% is a lot. I read somewhere that the investment that the Ontario Pension Funds put into FTX was only 0.96% of the entire pension funds and they still lost $96 million. Imagine if they put in more than 1%.

 

[tomkat22]

I've always felt that traders with smaller account balances are going to have to be a little more aggressive in their general risk taking than traders with large account balances. I just dont think they're going to grow their account otherwise.I know some people may look at it just the opposite though and that's fine. Max 2-3% stop loss would be a good starting point and can be tweaked later if desired.

 

[Peter8519]

It's not easy to have a winning trade every time. We know it only when we look back at the chart. Just jot down a few stocks using technical, fundamental or whatever means and look back a few days or weeks later and see how many are winners. Some just have a knack of sensing the direction of the market. Rare skill indeed. In the current market condition, getting out when there is money on the table seems sensible.

In view of all these, it makes perfect sense to limit our position and size. Each trade is just a bet. Based on 1%, a $50K account, can only afford a move $500 against each position.

 

[TheDawn]

It's not easy to have a winning trade every time. We know it only when we look back at the chart. Just jot down a few stocks using technical, fundamental or whatever means and look back a few days or weeks later and see how many are winners. Some just have a knack of sensing the direction of the market. Rare skill indeed. In the current market condition, getting out when there is money on the table seems sensible.

In view of all these, it makes perfect sense to limit our position and size. Each trade is just a bet. Based on 1%, a $50K account, can only afford a move $500 against each position.

Especially when you don't know how many $500 losses you might have. If you have a string of 10 of these losses (god forbid), you've already lost 10% of your entire trading capital and that's only risking 1% for each trade. Trading is very difficult indeed.