I was told to not lose in a trade more than 2% or 3% of your total equity, but such a rule does not consider the effect of drawdowns. If the probability of a drawdown is small, perhaps I can risk more. On the other hand, if the probably is big, I should risk less. Furthermore, is there a threshold for a day? Another question: When I was writing my system, I, to imitate slippage, charged myself $0.01 per share traded. So, a round-trip of a 1000-share position equals 2000 shares traded, or $20 commission. The return was a net $0.008 per share-traded in profit. Now, what I did not realize is that I might be pushing myself to take bigger risks to make up for the high commission. The question is if the profit is so small, why don't I just pick a volatile stock and scalp?
If "writing your system" means "programming it into a computer", why not run that program on historical data? You can see for yourself, the relationship between position size and drawdown -- in the past. The future may not be a perfect duplicate of the past, however.
A volitale stock will move very fast against you. Scalping, in my opinion isn't the way to go. Drop you share size, trade the volitale stock, and give yourself some breathing room (much wider stop than you would use at 1000 shares) But what do I know...
Most traders risk a small percentage of their bankroll on each trade because the probability of a large drawdown cannot be known in advance. Of course, the drawdown is related to the number of losers and expecially to consecutive losing trade sequences during a given time period. For an excellent treatment of the subject I recommend the recent book by Michael Harris Profitability and Systematic Trading chapter 5: http://www.wiley.com/WileyCDA/WileyTitle/productCd-047022908X,descCd-tableOfContents.html Ron
of course your position sizing considers drawdowns. Its 2-3% of your current capital, not fixed capital.