Daily Risk Rule

Discussion in 'Risk Management' started by ps0013, Sep 19, 2019.

  1. ps0013


    I understand that proper trade risk shouldn't be more than 1-2% of your account, but what should a daily risk rule be?
    If I have 10 open trades at 2% each do I have too much at risk?
  2. Robert Morse

    Robert Morse Sponsor

    These metrics do not apply to all. You will have to develop what works for you based on your strategy and comfort level.
    imjohn, tommcginnis, Nobert and 4 others like this.
  3. tomorton


    Much depends on how correlated your positions are. If all 10 2% positions are breweries located in the US mid-west, that's just like one big 20% position on the mid-west brewing sector.

    But if you are long one US mid-west brewery, a tech stock, a pharma, a manufacturer, an oil producer, a fashion retailer, etc. etc. the specific correlations are much reduced.

    BUT - this does not make your portfolio fire-proof - when the investment sector as a whole decides its less risky to be in bonds than in stocks market, its common that all stocks fall at the same time.
  4. lindq


    If you have 10 open trades and each is putting 2% of your account at risk, then you have 20% of your account at risk for the day. Fine if they are well diversified across a number of markets, and there for a good reason. But bad if they are not.
    tommcginnis likes this.
  5. The positive side of having that kind of high correlation is that now, hedging your portfolio with VIX (or SPX products) becomes more effective. So, a double benefit for doing the right thing.
    tommcginnis and tomorton like this.
  6. gaussian


    Personal preference really. Diversification is important and generally you should keep 50-60% of your account in cash to handle margin calls and drawdown.

    I generally limit myself only on maximum loss per month. If my loss exceeds 10% of my total account value I back out for around a month as a cool-off and study period. I don't really limit myself to how much I have out at a given time, assuming it is diversified and relatively liquid. Of course, I keep majority (around 60%) of my account in liquid cash. This is a throwback to my poker playing days - you always want to keep "re-buy" cash on hand and limit your total table loss by percentage to avoid tilt.
    T-Mex likes this.
  7. Fonz


    The risk is also the duration of the investment, the type of investment, leverage or not, long or short, etc. During a great market crash, everything except volatility will go down. Brokers can also go down.
  8. ps0013


    gaussian, do you trade for a living? Backing out for a month sounds like it would be almost impossible if you were trying to generate income
  9. gaussian


    No, but there are plenty of traders that are professionals and many prop shop risk teams that enforce the same rule. If backing out a month kills you, you have real cash flow problems trading more won't solve.
    T-Mex likes this.
  10. imjohn


    Agree with R Morse, this is an individual thing based on trader.

    I don't have a daily risk rule. I just take every valid trade, no matter how good or bad the day/week/month is going. I used to dwell on it as I've read tradescience to stop trading for X amount of time if you lose X amount of trades.

    I've experienced (and will continue to experience) agonizing days where every trade is a loser. It's maddening in the moment. But looking over my records, it's worked well for me to take em' all. Good days have exceeded and outnumbered bad days.

    Note: I'm all-in / all-out, 1 trade at a time. No experience balancing multiple positions at time. YMMV.
    #10     Sep 25, 2019
    ps0013 likes this.