The Unmentioned Risk of Trading Too Small

How much do you risk per trade (approximately)?

  • less than 1%

    Votes: 5 12.5%

  • 1%

    Votes: 9 22.5%

  • 2%

    Votes: 8 20.0%

  • 5%

    Votes: 4 10.0%

  • more than 5%

    Votes: 14 35.0%
  • Total voters
    40
actionzip54, I think good advice, thanks - certainly not planning on risking more than 1% any time soon. I take your point on a 20%+ whack!

Not sure if this is common but I know of at least one hedge fund that resets all trader accounts at the start of each year (I must have read this somewhere). The fund banks profits and its traders get paid. Once a trader has secured some agreed level of profit he is allowed to risk more at his discretion provided drawdown doesn't penetrate the agreed margin - I suppose its this kind of scenario, besides high win rate methods, that can allow for 5% risk or more.
 
I particularly like:
Quote from iankotze:
Think of it like this, if you reach the next level you reward yourself with the opportunity to up size a bit and therefor stand a change of gaining more income.
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jack hershey,

I appreciate your feedback.

I'm not sure our perspectives are the same. I swing trade and typically hold for a few days, so managing a number of positions isn't (hasn't been so far) a problem. I don't micro manage intraday. I gather you're capturing moves lasting minutes rather than days.

By risk I meant the account proportion lost if stopped out. If we're talking about exposure, then I risk no more than 10% of the account on any position.

I see what you're saying about late entries / early exits. My entries are often too early, and sometimes I even flinch and get out before the eventual "high velocity" part of the move - a problem I need to resolve. When I do stay with it I normally get out at a technical target or when there's evidence it's not going to get there. This depends on the type of setup.

I am extremely risk adverse so I do not deal with risk. To assure no risk...

That's a big statement. No risk at all?

I'm interested, what do you filter on - what are the expressions? Can you grade your expressions by significance, and if so is it your two least significant expressions that are adjustable?

Most people who trade do not concern themselves with what is important. Making money, apparently, is not well understood.

If you're suggesting most people don't properly utilize their capital and aren't efficient at capturing profit from the full capacity of the market, then I'd fall into that category. Irrationality still seeps in, but not so much that I perceive it as a serious problem.

I've enjoyed reading through some of your posts. Cheers.
 
I think the amount you risk needs to be factored into the size of your edge and how often you can trade it.
 
Quote from Stockie:

You hear it over and over: never risk more than 1 percent of your account on any trade.

Others say 2% or 5% and I've heard of some risking no more than 0.5%.

But I've been aware lately of the risk I face of trading too small.

If I went my trading career only ever risking 0.5% and executed 100 trades per year, assuming a risk:reward of 1:2 and win rate of 0.5 I'd grow my account by 25% annually. If on the other hand I risked 2% using the same strategy I'd grow my account by about 250%.

Over 5 years, assuming I efficiently compounded, at 0.5% risk I'd have a return of 300%. But at 2% risk the return would be more like 10,000%.

By trading too small I'd risk missing out on a significant amount of profit.

According the maths (British spelling) over that 5 year run I'd be likely to experience a losing streak of 9 losses in a row. At 0.5% risk that would be a 4.5% drawdown and at 2% risk an 18% drawdown. The 18% drawdown wouldn't be fun but it wouldn't matter in the long run, the return is still 10,000%.

(By the way, I'm cooking and knocked up those numbers quickly - so may not be correct!)

This is all theoretical and in reality efficiently compounding isn't necessarily practical, but my example demonstrates that we should aim to risk the optimal amount according to our strategies and long term account accumulation.

Is my thinking on this wrong?
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It could also depend on the variance of your reward. If variance is zero, it could cut your draw down in half (number from the top of my head) which translates to a doubling in leverage compared to a reward with variance = square of mean reward.

PS: I think you started an excellent thread!
 
Quote from Stockie:

You hear it over and over: never risk more than 1 percent of your account on any trade.

Others say 2% or 5% and I've heard of some risking no more than 0.5%.
More...

Listen, it's extremely simple: backtest your system with 0.5% risk per trade, then 1%, 1.5%, 2%, ...5%, ...., 100% and you will get the optimal value to risk per trade.

All the rest is just bar conversation.
 
Quote from tradingjournals:

In the polls you are missing 3 options: I do not know, 100%, and it depends on how I feel.
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Unfortunately I can't edit the poll, otherwise I'd add those three.

Other options include:

- "a margin call from my broker"

- "I'm a vendor; other peoples' shattered hopes and dreams"

- "Nothing, I just keep holding 'til it comes back"

- "Uh-oh, little green bar turn into big red bar"
 
Quote from tradingjournals:

It could also depend on the variance of your reward. If variance is zero, it could cut your draw down in half (number from the top of my head) which translates to a doubling in leverage compared to a reward with variance = square of mean reward.

PS: I think you started an excellent thread!
More...

Thanks, glad you think so. I was doubting its usefulness and still am, but at least a bit thought provoking (for some).

So basically, smooth equity curve => more predictable / less chance of horrible drawdown => more risk allowed.

Not sure if you meant the variance of reward size or variance of rate of reward. Or both, since they'd both affect the equity curve?

I bet if I implemented this though I'd end up no better off than simply following straight forward (KISS) risk management approaches, such as:

Quote from xelite777:

Listen, it's extremely simple: backtest your system with 0.5% risk per trade, then 1%, 1.5%, 2%, ...5%, ...., 100% and you will get the optimal value to risk per trade.

All the rest is just bar conversation.
More...

http://en.wikipedia.org/wiki/KISS_principle
 
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