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5% risk per trade?

  • #1
  • First Post: Dec 16, 2012 3:21am Dec 16, 2012 3:21am
So I was running through some montecarlo simulations, using different levels of risk. Most people recommend 1-2% equity risk per trade, which is fine. But is anyone trading above these values? I checked a trading system with 2,500 theoretical trades at 5% risk, 50% win rate, 1.25-to-1 reward-to-risk, and the numbers are mind-boggling ($10,000 starting equity turned into $1b equity).

Of course, at higher risk, your drawdowns are going to be greater. At 5% risk, I saw drawdowns up to 70% or above. I'm unsure whether humans can bear such losses.

Thoughts?
  • #2
  • Dec 16, 2012 4:44am Dec 16, 2012 4:44am
I am new to forex. But about 2 weeks ago started testing long term charts and using 5%-7% risk with no sl or tp, this of course in demo account. And in less then 2 weeks i am up 60% (this is mainly due to no tp and very good win ration).

I think its doable in long term if sl and tp is in place and win rate is kept high.

I will test it for few months.
  • #3
  • Dec 16, 2012 5:03am Dec 16, 2012 5:03am
Quoting KingKaivar
So I was running through some montecarlo simulations, using different levels of risk. Most people recommend 1-2% equity risk per trade, which is fine. But is anyone trading above these values? I checked a trading system with 2,500 theoretical trades at 5% risk, 50% win rate, 1.25-to-1 reward-to-risk, and the numbers are mind-boggling ($10,000 starting equity turned into $1b equity).

Of course, at higher risk, your drawdowns are going to be greater. At 5% risk, I saw drawdowns up to 70% or above. I'm unsure whether humans can bear such losses....

for monte carlo i use an excel spreadsheet. at 50% winrate and 1.25 r/r you will see that it's possible to go broke after 100 transactions. this is a lousy system to begin with not to mention 5% risk. if it was 50% and 1.8 reward risk that would be ok.
  • #4
  • Dec 16, 2012 5:13am Dec 16, 2012 5:13am
i used 10%. now down to 5%. I do not decrease bet after losing, so 20 losses out.

As i am discretionary, find that larger bet motivates me and results are better. 1-2% toooo small.

However, I go papertrade after 3 net losses from high ie 15%. Ensure that my system still ok and then back. Lowest I came with this I think was 6 losses.

valleys keep small
  • #5
  • Dec 16, 2012 5:14am Dec 16, 2012 5:14am
Quoting deltatrade
for monte carlo i use an excel spreadsheet. at 50% winrate and 1.25 r/r you will see that it's possible to go broke after 100 transactions. this is a lousy system to begin with not to mention 5% risk. if it was 50% and 1.8 reward risk that would be ok.
A profit factor of 1.25 isn't unusual for a mechanical system, at least in my experience.

Also are you sure you're going broke after 100 trades? This is 5% risk of present equity, not 5% of starting equity.
  • #6
  • Dec 16, 2012 5:22am Dec 16, 2012 5:22am
Quoting KingKaivar
A profit factor of 1.25 isn't unusual for a mechanical system, at least in my experience.

Also are you sure you're going broke after 100 trades? This is 5% risk of present equity, not 5% of starting equity.
not broke. i misspoken. but it's highly possible that you will lose money in 100 trades.you can lose 8-9 units of risk. multiply that by 2% and that's a 18% loss in 100 trades. that system for me is out of the question.
  • #7
  • Dec 16, 2012 10:01am Dec 16, 2012 10:01am
Quoting KingKaivar
Of course, at higher risk, your drawdowns are going to be greater. At 5% risk, I saw drawdowns up to 70% or above. I'm unsure whether humans can bear such losses.
Thoughts?
This is a problem with learning to trade...too much theory. The only way you will ever know how much you can bear losing is to start losing. Also, you have to deal with the constant fact of losing, separate from the money, beating on your mind. I've been through some very long losing streaks, but hung in because I didn't go beyond my loss limits.

It's like anything in life, theory is great, and necessary, but the theory needs to be put into practice. The results then inform the theory and the theory will change. Then more application, more results informing the theory, more adjustments to theory, ad infinitum. It's called praxis. Get to trading and testing these theories for yourself.
  • #8
  • Dec 17, 2012 1:32am Dec 17, 2012 1:32am
Quoting Dopey
This is a problem with learning to trade...too much theory. The only way you will ever know how much you can bear losing is to start losing. Also, you have to deal with the constant fact of losing, separate from the money, beating on your mind. I've been through some very long losing streaks, but hung in because I didn't go beyond my loss limits.

It's like anything in life, theory is great, and necessary, but the theory needs to be put into practice. The results then inform the theory and the theory will change. Then more application,...
What this guys said.

DOn't be an excel spreadsheet trader either. I see a lot of that in this forum.

1-2% risk makes sense only if you are just starting out and have no clue to what the hell you are doing.

Once you have an edge in the market, increase your betting size! use the leverage but still maintain that reasonable risk per your method.
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  • #9
  • Dec 17, 2012 5:12am Dec 17, 2012 5:12am
Quoting teofil00
I am new to forex. But about 2 weeks ago started testing long term charts and using 5%-7% risk with no sl or tp, this of course in demo account. And in less then 2 weeks i am up 60% (this is mainly due to no tp and very good win ration).

I think its doable in long term if sl and tp is in place and win rate is kept high.

I will test it for few months.
If you are not using a stoploss, how do you know how much you are risking per trade? You must at least have a mental SL and then you need to constantly monitor the trade.
Please Do Not PM Me With Coding Enquiries
  • #10
  • Dec 17, 2012 5:44am Dec 17, 2012 5:44am
Quoting Gumrai
If you are not using a stoploss, how do you know how much you are risking per trade? You must at least have a mental SL and then you need to constantly monitor the trade.
Yes i had a mental SL, of around 6%. Now i use sl of around 3%-5%. At the end it all comes down at how confident you are in the particular trade.
  • #11
  • Dec 19, 2012 5:22am Dec 19, 2012 5:22am
5% is far too high.


Max should be 1%.

Here's a tip:

1) The big money makers are the ones that take small profits but on a huge scale. Think 20% p.a on $10M+

2) The work form home, stressed out, losing traders go for home runs by taking on too high risk.


Which side do you want to be on?
  • #12
  • Edited 5:26am Dec 19, 2012 5:25am | Edited 5:26am
No you can't. Only 30% off losing the lot. Is that the way to run a business? What about peace of mind?

I read a white paper on professional trading and they basically said anythig more than a 30% loss on the acount and it's all over. If you ever managed O.P.M. they'll start pulling money out with more than 15% losses. Hence why big funds main concern is keeping drawdowns to less than 10%. Bernie Manderhoffs huge success wasn't his gains (12%) but the fact he said "no losses." Shame it was a complete scam.

Quote
Of course, at higher risk, your drawdowns are going to be greater. At 5% risk, I saw drawdowns up to 70% or above. I'm unsure whether humans can bear such losses.
  • #13
  • Dec 19, 2012 6:39am Dec 19, 2012 6:39am
Quoting KingKaivar
A profit factor of 1.25 isn't unusual for a mechanical system, at least in my experience.

Also are you sure you're going broke after 100 trades? This is 5% risk of present equity, not 5% of starting equity.
I think it's more of the assumption you've placed on your edge. 50% win rate plus a 0.25 expectancy is quite the high flyer.

But anyway, I try to stick to less than 2% myself. On my manual accounts I'm often risking ~0.50-1.50% depending on how confident I am in the trade.

Yes, I could trade for more risk, and yes this would positively impact my returns very much so, but my win rate for scalping is close to 51%, and I know full well that streaks of 5, 10+ losers in a row can happen more frequently than desired (along with streaks of winners, which is much more desired obviously but in my mind I know they'll eventually even out.) So ideally, I'd rather lean toward capital preservation and manage a losing streak where it doesn't hurt me overall more than a few percentage points. I like knowing that even in my worst of months, I didn't do much damage at all.

There are two key thing to consider as well when we look at the psychological side of risk:

1) I'm also helping to keep my emotions in check by keeping losses limited, since seeing a larger drawdown might influence a future trading/execution decision.. such as hunting for a trade to get back in the market when there isn't a good trade to be had, or risking more to make back some losses...etc... all the classic things that kill accounts over time.

2) I'm giving myself a lot of 'fudge' room. Even the best traders are human and humans can make mistakes. If I screw something up (unintentional or by breaking a rule of mine) it doesn't significantly affect my overall returns since I've limited my risk per trade as such. Plus, if I detect a bad pattern of behaviour, lasting multiple trades (like a streak of revenge trading, etc) then even with the time it takes to realize this I'm not hurting my account much at all.

If you start risking more, say 5-10% per trade, and go through these psychological/human catches... you might have done some serious damage before you realize what happened. After all, 10 trades in a row at 5% risk would decimate an account.
FXGears.com
  • #14
  • Dec 19, 2012 10:35am Dec 19, 2012 10:35am
Quoting Jack_Larkin
I think it's more of the assumption you've placed on your edge. 50% win rate plus a 0.25 expectancy is quite the high flyer.
Hmmm, what do you mean by "high flyer"? The system is too good to be true? I've probably tested 50+ systems in the last year. Almost all fail or show negligible profit, but there were a few which produced profit factors in excess of 1.25 over 11 currency pairs from 2001-2012 (so the systems are sufficiently robust IMO, with a sample size of 1,000+). I think 1.25 is quite conservative for a tradable mechanical system. I could be wrong, of course.
  • #15
  • Dec 19, 2012 10:56am Dec 19, 2012 10:56am
Quoting KingKaivar
Hmmm, what do you mean by "high flyer"? The system is too good to be true? I've probably tested 50+ systems in the last year. Almost all fail or show negligible profit, but there were a few which produced profit factors in excess of 1.25 over 11 currency pairs from 2001-2012 (so the systems are sufficiently robust IMO, with a sample size of 1,000+). I think 1.25 is quite conservative for a tradable mechanical system. I could be wrong, of course.
Question: Since not all edges last over time, and in most cases their returns slowly slip into the noise of the market, is 5% risk per trade going to give you enough room to identify when something's wrong before your account takes a serious hit?

Another consideration: Would you trade a $100,000 account willing to risk $5,000 (5%) per trade? Should a smaller sized account be any different?

How about risking $50k on a million dollar account?

Often people justify risking a greater % of their account if their account is smaller, but at the same time it becomes more likely their account will never see a larger balance (at least, not thanks to profits that is) due to increasing the odds that mistakes/errors/losing streaks chop down the account significantly.

I'm not trying to be overly strict in what's 'right/wrong' in trading.. but I do want to focus on capital preservation as it relates to the human side of trading (errors/rule breaking/emotional trading/etc..) since this is posted in the 'rookie' section after all.
FXGears.com
  • #16
  • Dec 19, 2012 10:57am Dec 19, 2012 10:57am
Oh, "high flyer" as in a good performer. Flying high, or flying above the rest... etc.. figure of speech.
FXGears.com
  • #17
  • Dec 19, 2012 11:52am Dec 19, 2012 11:52am
Jack, I have not praised anyone on a forum before but your posts are very educational on a subject that has been on my mind a lot recently.

Thanks for you time and explanations on an acceptable % risk of an account per trade/position. Invaluable.
  • #18
  • Dec 20, 2012 9:28am Dec 20, 2012 9:28am
Quoting Jack_Larkin
Question: Since not all edges last over time, and in most cases their returns slowly slip into the noise of the market, is 5% risk per trade going to give you enough room to identify when something's wrong before your account takes a serious hit?

Another consideration: Would you trade a $100,000 account willing to risk $5,000 (5%) per trade? Should a smaller sized account be any different?

How about risking $50k on a million dollar account?

Often people justify risking a greater % of their account if their account is smaller, but at the...
I ran some more Monte Carlo simulations and concluded that 5% is excessive. In fact I will probably stick to 0.5% risk. I spent some time over the last few days reading Cashflow Quadrant (Rich Dad Poor Dad series). The key to wealth isn't so much in taking large risks, but in using other people's money (OPM). No person or bank is going to give me money with 20%+ drawdown. I will treat my trading as a professional hedge fund and look for an expected drawdown of 10% (max 15%) over my trading life. Professionals try to minimise drawdown while maximising their profit:drawdown ratios. Time to be serious.
  • #19
  • Dec 20, 2012 10:51am Dec 20, 2012 10:51am
What does % risk even matter when talking so baselessly. I use 5% on systems when I fund an account with 10% of my trading capital so in theory it's 0.5% risk per trade
  • #20
  • Dec 20, 2012 11:05am Dec 20, 2012 11:05am
The idea that 10% or less is considered an acceptable drawdown doesn't make sense to me.

I think we trying to use the standard of hedge funds and institutional traders and apply that to us retail traders. these guys have clients to answer to. Clients who probably never placed a trade in their life.

I personally think 20-30% drawdown for a retail trader is normal. If you decide to trade for others in the future, then that's a different story.

But for the most part retail traders should be able to withstand larger drawdowns and also can push for bigger gains (excess of 200%).

imo
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