Understanding risk to obtain 2% risk of loss max per trade

earth_imperator said:
@HobbyTrading, thx, I think I've got an idea for calculating this exactly: via the probability space 1 - p
Will try to find a formula.
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After thinking a while on this problem I came to the conclusion that one can create a generic solution for all position types only by creating a PnL diagram by simulating it, much like the Put Spread case I posted here.

A position can also be losing at both sides from the current spot, like in this example: https://optioncreator.com/short-straddle
This PnL diagram is of course much different than from the PnL diagram of a LongStock,
therefore a general formula for all cannot exist, IMO.

For single stocks a simple solution via a simple formula might exist, but it's obviously not a general solution for all possible position types.

For a portfolio often a VaR (Value at Risk) calc is used, but IMO it's not the correct method. Instead it must be done like I wrote above: one has to create a PnL diagram for the whole portfolio by simulating it, and then determine the MinPnL% (within say 3SD). If that's a negative value than it's the max loss at risk.
Should be done for each position individually, then the MinPnL's summed together and from that the MinPnL% calcd, as this way it's much easier to perform.
 
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lmseldin said:
I have read books where they recommend to not have more than 2% risk. I take that to mean 2% loss to a trading account per trade.
Looks like the only way to get down to a 2% risk is to add more assets to limit my risk. Or trade less % of equity. I do have other accounts that I do not actively trade.

I do understand that it is unlikely that any of these assets ever lose 100% because these are broad based assets usually based on an index.
thank you,
Larry
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%%
WELL adding a diversified very liquid ETF like EWZ[Brazil], sure did work well this year, not with a 2% ''noise'' stop loss\LOL.:D:D
But while EWZ worked out fine in 2022+sure has had some very good trends in the past.....
EWZ,10 years=0.34% LOL+ 5 years= [-1.35%],terrible]+ terrible % compared to SPY benchmark. EWZ maybe an underperformer risk, except for 2022.
Good points =on not likely @ all to lose 100% n any of these
 
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