Risk of Ruin

Discussion in 'Trading' started by Lightningsmurf, Jun 14, 2002.

  1. Our hero TrademanSpiff has an account with $50,000. He takes overnight trades and uses 2X margin. If our hero takes 10 positions of $10,000 each and puts a 1% stop loss on each ($500), what is his risk of ruin under the following circumstances.

    a) ten positions, 5 long, 5 short.
    b) ten positions, but five have break even stops.
    c) etc....

    What I'm wondering is how great the R of R is under various circumstances. If there is a market meltdown but our hero has 10 short positions, presumably he will be ok. If the same meltdown happens with 10 long positions that have break even stops he will probably get hurt - but how hurt?

    Other than not trade, what prudent efforts can our hero make to minimize his chances of going BOOM?
  2. If your hypothetical person is always margined to the maximum and always 100% long or 100% short, and always strictly daytrading, then I think he is doomed. Between the margin interest, transaction costs, and the occasional unforeseen event in the market, his days would be numbered. The crazy thing is that he could get on a hot streak at the beginning and it might take years to go broke, but it would inevitably happen.
  3. risk of ruin can never be truly quantified.

    not in trading, not in business, not in life.

    all you can do is be careful and smart. imagine the worst plausible event (note the word 'plausible') and then use that scenario to factor your leverage or lack thereof.

    p.s. dotslash i think it's a bit off to include things like margin interest and execution cost in a risk of ruin calculation. R of R is about seeing your account go bye bye due to a single catastrophic event, not a bleedout (at least the way i understand it). If a trader has been able to survive and profit for years and years, we can at least say that his edge has overcome his overhead.
  4. Lightening;

    Personaly;as someone who likes to swing trade[trend=friend].I'd trade smaller than that .Lightening hits big trees more often-not a pretty picture.:cool:

    With SPY ,QQQ near SEPT lows,I've been select day trading lately,and much of the year.[30 minute candlecharts......]

    All gave some, some gave all.
  5. dis


    I have made quite a bit of money by holding positions overnight, unhedged and without any stops. Hey, I was 100% short going into this morning. As long as no leverage is employed, the risks are manageable (short -10%, long -25%).

  6. two words: survivorship bias
  7. dis


    That is, "statistical analysis".