Probabilities and trading

Discussion in 'Strategy Development' started by OPC, Jan 19, 2003.

  1. OPC


    Dear Fellows:

    I would like to know some of your experiences about money management principles, probabilities and trading.

    It has been said somewhere on this board that trading is: 10% entry, 40% risk and money management, and 50% trust and the ability to execute.

    I would like to know which winning percentages and reward to risk ratio could be considered reasonable for profitability, and in which style (position, day trading or scalping/mechanical or discretionary).

    The point is trying to make an estimate of real trading numbers, as related to mechanical and discretionary approaches.

    Just hope that this is not asking too much. :)

    Best regards,

  2. Use position sizing and stop loss orders to limit your risk per trade to 1% of your trading capital. If you have 10% of your capital in a trading position then your stop loss had better not be more than a 10% loss on that position ( 10% of 10% is 1% of your total capital ).
  3. OPC


    Do you think that 4% risk per trade would be a tall order for futures?

    With regard to position sizing do you know of any formula to be used with futures and any rule of thumb about position sizing?

    Sorry for asking so much. I confess I am quite ignorant in this respect. Have just ordered a book about it and is on the way. Meanwhile I will appreciate to know the numbers directly from the trenches. :)


  4. 4% of your total market capital would definitely be too much to risk on one trade. (I say market capital because... say you've got $500K total capital, but only $50K in a futures trading account. 4% of $500K = $20K... too much to risk on one trade. But 4% of 50K = $2K... which is 0.4% of total capital. That's OK, presuming you are willing to transfer more of your total capital into your futures trading account if it draws down too much.) If you are just moving into futures trading and have decided not to replenish your futures account should it draw down too much, then don't risk more than 1% of your futures account on one trade.

    Rule of thumb... "never risk much more than 1% of your total investment capital on any one trade". :cool:
  5. OPC


    Thanks, gnome.

    Yet, in the above example, 10% of total capital committed to futures trading would be $50K. This amount allows for simultaneous margin in different markets. So, could I diversify the portfolio by trading, for example, three different markets simultaneously, risking 1% of the total investment capital per trade? Or should I add a margin excess criterion for the futures account?

    Best regards,

  6. AusTrader


    Never risk more than 2% per trade. Aim for a system that has a higher win/loss ratio (ie greater than 1.5) and expect a win rate around 50%. The win/loss is important, then just trade with patience. Your 2% risk will ensure you stay in the game, the win/loss will ensure you have a mathamatical edge.

  7. If you want to use as little capitol as possible try the SP E-minis with 15k. Set you targets and stops and trade mechanically with a system. Be a neutral trader a system. Do not hold your trades overnight. Do not rely upon lagging indicators.

    As a rule of thumb be prepared to use 5k per ES contract. Try to trade with 3 contracts and scale in your entries and scale out your exits. If you trade just 1 contract then you must be 100% correct on the direction to be profitable on that trade. Do not set your stop larger than 8 points from your entry signal (not your actual entry).

    As you gain experience (after 1000 trades) then you can use more discretion. But the main thing is to survive and learn how to trade.

    Michael B.
  8. "ES contract. Try to trade with 3 contracts and scale in your entries and scale out your exits. "

    I prefer to do 2 contracts max ... more than that and I sweat too much :)
  9. OPC


    Thank you folks for your advice. I look forward to implement them before I make my next trade.