is this too risky?

Discussion in 'Trading' started by hermit_trader, Jan 24, 2003.

  1. Assume I only risk 1% of my capital in any trade.

    If I buy 1 NQ and 1 ES at the same time and each of them I take 1% risk, is it actually a 2% risk trade? Since they are somewhat correlated.
     
  2. That would give you a market exposure of what, about $70,000. Is that too much for your capital?:cool:
     
  3. effectively, yes.
     
  4. man

    man

    In my opinion no. if you trade them as a pair and thus always have opposite positions, you're overall market risk would actually be reduced rather than increased.

    Your risk depends on your stops not on market exposure IMO.


    peace
     
  5. It sounds like he's buying one of each, not trading pairs in opposite directions. Please correct me if I'm wrong.

    IMHO, I would consider buying one ES and one NQ just as they are...two separate positions, each with a risk factor of 1%. Although the indexes often move in sympathy with each other, there are also sometimes discrepancies where, for example, the Nas 100 may be up and the S&P 500 may be down. But since this is not the norm, probably 90% of the time a position in both ES and NQ could rightly be thought of as a single (I'll call it a "broad-based market position") with a 2% stop-loss.
     
  6. Corallus:

    Yes. You are right. I mean buying(or long) one ES and one NQ at the same time.
     
  7. cheeks

    cheeks

    I agree with corallus. To highly correlated.
     
  8. I think this whole idea of deciding position sizing by 1% risk is not sound. There is an excellent discussion of this issue in Gallacher's book, Winner Take all. His view is you need a certain amount of capital for each contract traded, period. It depends on the size and volatility of the contract, not by where you set your stops.

    The 1% issue comes into play in deciding if your stops are too big for your account. Actually, I think 1% is too small. It is a figure that large CTA's trading trend following systems use to minimize drawdowns. A decent daytrader can "risk" much more and be fairly safe.

    There is a misconception as well that you control your risk with stops or exit points. You can more or less control the maximum loss on any one trade with stops. You cannot control anything else. If the stops are too tight for the tradeable, you will just get cut up over time. In fact, a "riskier" approach can be less risky in the long run because you get stopped out less.

    As for the initial question, yes the two contracts are for all practical purposes the same. Show me a day where they didn't correlate strongly and I will show you a rare exception.