Risk on a trade based on current PnL or quality of setup?

Discussion in 'Risk Management' started by Peblo, Oct 24, 2017.

  1. Peblo


    What do you think of adjusting the amount risked on a trade depending on the "quality" of the setup? It is very subjective after all so how to tell in advance whether a trade is worth betting more?

    Is the alternative approach of adjusting the risk based on current PnL better? As a day trader you are thinking in terms of profit for a particular day so it would make sense to risk more when you have a "cushion" of PnL built up in the day earlier that will protect you against hitting your daily loss limit.

    Money management is a tough area, must say.
  2. IMHO: The most difficult step is determining your requirements (what do YOU want<-be anally specific). Tail chasing (trying to fit what someone else's requirements are to yours) can be circular, if you don't keep each in perspective.
    I agree... Money management is non-trivial, but is key.
  3. Robert Morse

    Robert Morse Sponsor

    I like the idea of rating each trade before you enter them based on some expectancy. For many it will be very subjective, rating 1-10 with 1 being ignore it and 10, max allocation. If you keep very good records overtime, you can have ratings based on what did happen, and hopefully increase your odds of success that way.

    Risk management has two basic components. How do I protect my capital and how best to allocate toward ideas that give me the best chance of making money. Your comment addresses the allocation.
    JackRab, MattZ and dealmaker like this.
  4. qxr1011


    no you do not

    as a trader one must think in terms of the best use of one's trading method in current situation (which constantly changes),

    an earned money (sometime when no mistakes or errors were made the lost money as well) is just a result of the proper application of the working method,

    and the so called money management has nothing to do with it whatsoever...
  5. Peblo


    OK, but what about a situation where you've been trading 2 hours, made a decent profit and then take a trade with big risk allowance that destroys your PnL for the day? Is it not better to use smaller risk after reaching a certain threshold in PnL?

    For instance, if your max position size is 20 contracts, start the day with 16 contracts per trade. If PnL is < -1000 USD, use a smaller size of 12 contracts. If PnL >1000 USD, increase the size to 20 contracts. So anywhere between -1000 and 1000 USD PnL you trade 16 contracts each time. Does that make sense?
  6. Robert Morse

    Robert Morse Sponsor

    If you were a blackjack player that counted cards, and the count was in your favor, and you were up money, would you drop your betting size?
  7. Peblo


    I would increase my betting size. So, do you support such approach? If you are up money, increase the size/risk per trade. Is that the holy grail?
  8. qxr1011


    there is trading and there is masturbation, you describing the later :)

    ==OK, but what about a situation where you've been trading 2 hours, made a decent profit and then take a trade with big risk allowance that destroys your PnL for the day?===

    What a hell is a big risk allowance?

    I do not know such thing.

    I know only the trades that the method called for, that's it, and I take them

    Chose a size based on your method, and stick with it and with your method !

    And what a hell is PnL?

    One has to do the right thing that's it..

    and the only right thing that trader can do is to follow his method regardless ...
  9. Overnight


    I have gone through this scenario as well, and I understand your idea. It is something like, "Well, I have made +$1,000 today, and my max loss I set for the day was -$1,000. That means that I can now take the risk of losing $2000 on this trade and still be at my loss-stop of $1,000 for the day."

    That is pure greed factoring in to the mindset. It can be a recipe for constant losses. It of course varies on the talents of the trader, but for me, if I have made positive what my max loss would have been on the negative I would stop trading.

    There are some here who argue to not using a max daily profit target, because that limits upside gains. But it also limits losing some of those gains by continuing to trade. Only you can figure this out, because only you know how you are while sitting alone at your trading desk, facing the reality of trading in your environment with all the smells, sounds, sights, distractions, etc that come with being you in your element.
  10. JackRab


    If you're already up for the day... that doesn't change the probability of a new set-up. It's more a psychological thing I guess... but it shouldn't make a difference in trading.

    Same when you've realized a loss... the next trade shouldn't really be any different if you would be up or down for the day. Unless you've got a hard dollar loss for the day when you stop trading...

    Like @Overnight says, it's more a mindset that is affected which might trigger a greedy trade... happens all the time, and usually I regret it. Like now, I've had a decent week last week and good Monday and Tuesday... so this morning I did a stupid trade and held it too long so I lost >1.5k on it.... shouldn't have kept it that long, but I did anyway because I was doing pretty well. Dumb... ;)

    You could perhaps do this when the profits make a big difference in your trading account size. So, when you've doubled your account... then you trade twice the size you used to, since the risk on the account stays the same in relative terms.
    #10     Oct 24, 2017