Managing Risk

Discussion in 'Strategy Development' started by traderguy02, Nov 12, 2005.

  1. I have often read that good traders will only risk 2-3% of their capital when trading. If my math is correct this works out to be about 2-3k out of a 100k account...this may buy you 1-2 or 3 contracts in a futures market depending what you're trading. And from this risk management you'll do well and make tons of money...Wow...couldn't imagine how long that would take with 2 contracts....Anybody care to back this up...is this overly prudent trading?
     
  2. dantes

    dantes

    I would think that what you have seen is that good traders take stops when down 2-3% in a particular position. that is different then using only 2-3% of your capital.
     

  3. Slow and steady.............. wins the race!
     
  4. Was just going to say.

    I only use 25% of my capital on each trade, but i only let it slide both ways (depends of course) 2 to 4%

    R/M is without a dout the most important aspect of trading.

    I was reading a while back someone who put up his whole account on every trade, could only make 1 trade at a time of course. Started to make big bucks, then from one trade, lost 45% of his account.
     
  5. A $100000 account, you're willing to risk 2%, i.e. $2000 on a trade, how many contracts should you trade? It should depend on the volatility of what you're looking at. With corn, you could have 1 contact and let it go 40-cents against you before giving up. That's too much leeway. A 2-lot can go 20-cents. That's still too much at current levels. A 4-lot can go 10-cents. That's a little better. A 20-lot can go 2-cents. That's cutting it way too close. Whether you use previous highs and lows, implied volatility or some other formula, atleast that can keep you from overtrading your position.
     
  6. sounds good Nazz...that seems like a pretty reasonable strategy
     
  7. Question for Nazz...how did you determine what your allowable loss would be...what made 10 cents a good range...how did you get that number?
     
  8. The 10-cents was a relative comparison to 20-cents, not an absolute. I pay most attention to yesterday's high & low price, multiple daily extremes and weekly extremes. You'll have to determine your own objective criteria that you'll feel comfortable implementing.
     
  9. traderguy,

    Ive backtested ATR and dollar based stops for equities in an End Of Day system, and a simple rule is best: no more than 5% of your account in one position. I do not mean risk no more than 5%, but no more than 5% as the whole position.

    Other methods Ive tried did not provide nearly the same return or lower risk as a 5% limit on trade size.

    For futures, it may be different, but small accounts have to risk alot more usually, if your trading SP500 futures or the like and have an account under 100k.