so here are my thoughts..... im sure we are all aware of the 'classical' trading texts. they all seem to have this concept of risk management & position sizing theories of only risking 2% of the account. all these theories however seem to be based around long term trend following - like its the only game in town. i believe most day traders then take this theory up - one of the reasons why few succeed. they just grind their account down. then i start to investigate how TODAYS big successful DAY traders go about their business. (harris brumfield, paul rotter etc) NONE of these guys seem to advocate such small %. they seem to take the approach that if they are right, they want to be right in a big way. large traders i know personally also have a similar approach. suggest to them only risking 2% and see how hard they larff!! side splitting. the theory for day trading that i have recently taken on is to be do as big a size as i can afford to take, given my recent performance (direction of my equity curve & win rate!). if i take a few hits i scale back. if i take a few wins, i double my size again. i am a discretionary trader however. i only take positions when i am sure. i acknowledge that if you decide to trade on a 100% mechanical basis or use an automated system, are active in many markets at once (i.e. playing a numbers game rather than specialization in 1 or 2 markets) that a tiny % could be a good idea. who has similar ideas to me? who thinks i wont be here in 6 months?
I think that the approach of betting much larger percentages of your account on a trade depends on a number of factors (I will only comment from equities trading perspective). One consideration would be whether or not you are leveraged. If you are, there is a fairly good chance that at some point you are going to blow out a huge chunk of your account, particularly if you are holding overnight positions. Look at BIIB for example, maybe you hop into a long position around $65 in late February, thinking that the stock is about to retest $70 and possibly breakout. Then all of a sudden BAM! - bad news hits and the stock price drops through the floor. A smarter approach to swing/position trading (assuming that you want to reduce your risk) would be to pick out a number of stocks to invest in simultaneously, diversifying your risk. I strongly suspect that traders swinging huge amounts of buying power take this approach, it's doubtful that they put everything on the line into a single stock. Intraday trading is a different story, again depending on your leverage. Assuming that the liquidity of the stock isn't an issue, and depending on your leverage, it probably wouldn't make as much sense to diversify, so long as you ensure that you cut your losses ASAP if it starts to move against you. Same story goes again though, since massive swings can and do happen. For example, I was watching TASR a couple of weeks back when it did a 20% intraday pop upwards, you would be hurting if your entire account was on the line in an intraday short position in that stock. So yes, you can potentially attain greater gains by risking it all in one go, but you definately expose yourself to being wiped out. I strongly suspect that diversified swing and position traders are the ones raking in the big bucks these days, anyone care to comment on this?
yes - i think we agree that risk % is a function of trading style. i am strictly a day trader. i trade futures so my leverage is higher than a stock trader. i rarely hold something for longer than 5 min these days. the longest was a couple of hours. (i sometimes leave some on when i see something that indicates its really gunna run) i am VERY strict with stops. i have never traded without one, and they are always kept very tight, so losses are always small (i accept that price can go past stops sometimes)
I have always taken the 2% rule to mean that one would never take more than a 2% of capital loss on any one trade. If you have $50,000 CASH in trading account then $1000 is maximum loss on any one trade. The theory being one would have to have 50 bad trades before you lose all of your capital. For actual DAYTRADING I would think one would want to adhere to this fairly close. When I was daytrading I used 1/4 point or $250 per trade before I was gone!! My attitude is that for intraday the trade should move in your favor almost at once. If not, then be ready to exit as something is wrong, if using Direct Access Screen with Level II. But I agree that the big money is now being made in short term swing trading or "catalyst" trading. Some factor that is easily recognizable and reported that will cause the stock to go up or down. Hedge funds are putting tons of cash in these trades. Just look at the average volume and compare to volume when some news happens. They go in and go in BIG. SteveD
guess this was a dumb section to start this one under. the 'trading' section would have been better. mods - can it be moved?? cheers
2% is a big risk for day trading, five losers in a row and you are down 10%. You would risk more than 2% if your win rate is like 75-90% and the big full size losers only occuring 5% of the time or less. Then you can risk 5% of your account because the big full size losers dont come very often.
Fred, All that you read and hear on these boards is what traders "THINK" sounds good. They can't be critisized for saying the trend is your friend...cut you losses short, manage your risk ,...bla bla bla.. You are doing the required work and finding out for yourself, which I commend you for. If your not here in six months, then you have discovered something. Believe it or not, thats all I can say on the matter. Michael B.
Agreed. In all the threads I've read here on ET, I'm surprised that no one has really brought up the relationship that exists between trading frequency and the optimal fixed fractional bet size... As you point out, 2% a trade for someone betting 10 times a day surely can't be a good thing, lol. Would anyone venture to come up with a simple formula that would describe the optimal risk fraction as a function of trading frequency? I'm sure that would be helpful to many here...
well im not a scalper - but im not a swing trader either. im typically going for between 5-10 ticks, so my trade duration can be seconds to a few minutes. sometimes, if i see that a big move may be about to materialize then i may hold. the longest i have done so was for a few hours. (fridays down move in er2 would be an example, but i had packed up by then). the situation is as follows: if i was to take EVERY signal that my criteria generated, then my win% would only be 50% - so id be dumb to put it all on, despite having a small edge at 50% however i am very discretionary and i only trade the very best of the set ups - the ones i am VERY sure about, so i only make about 0-3 trades a day. (empathy with the market is a BIG part of my trading) i am usually done by lunchtime. i know if i continue i am likely to start losing as the odds start to work against me. i accept that if i was taking every signal & making 10 or so 'random' trades with little empathy between what the market is doing and my setup then some optimal % like 2% would be sensible - but im not. im really not trying to boast here, but typically, only 20% of my trades lose money (BUT ONLY) if im on top of my self. (self empathy and market empathy are probably equal in my success in any day/week)