Risking 1% of your total equity. Does this refer to the stop?

This is exactly how to trade, IMO it would qualify as one of the best posts I've read on ET.

Great job.

 

I have hear about the 0.1 percent rule for day traders. This is in relation to total account equity, not how SL for open trade position is managed. Just of a rule of thumb to conserve your account equity so a string of losses wont deplete your account. Swing traders use larger size as they trade less frequently and often have multiple open trades in parallel.

 

Out of curiosity I googled " Position Sizing" and the way myself and a few others described is exactly how every article went about sizing.

Not to say there are not more advanced ways based off the metrics of the strategy but it's a method many use as a base.

It works perfect for myself because my trades are all rated in R multiples. I don't care about percentages or returns on a trade as my position sizes are always way different based off volatility.

If I risk 500$ on a trade and close the trade up 500$ I made 1R on that trade. I also have for instance a counter trend setup that I actually only risk .5 percent on the trade as it is a more active strategy that does pay off in the 2-3R when a trade is successful but because of its frequent trading I cut the size of it down to blend into my portfolio.

Maybe it's a crazy way to go about it but it keeps me comfortable and works for myself which is really all that matters.

 

The former: it means to set your stop-loss so that the distance between your entry-level and stop-loss level represents 1% of the capital in your account. Or, more accurately, to calculate your position-size, after identifying a suitable stop-loss level, so that that's so.

(I mention it only because I think that in three pages of conversation, nobody has so far expressly answered the question originally asked.)

 

if you used a stop loss, maybe you wouldn't be such a loser

 

Like I few other traders have mentioned I keep my risk averaged out to 80 basis points (0.8%). Depending on the recent and longer volatility average and chart pattern I may risk from 25 - 2% on any given trade. This is an important aspect of risk mgmt although there is more to it than just this. Nearly every long time successful trader sites risk/trade mgmt as the #1 reason for their sustained success.

 

Question: If you put a stop loss at 1% won't you be stopped quite frequently? Let's say you start with a $1K account (i.e., small retail traders) you buy XYZ at $100 per share or 10 shares, I would be stopped out if XYZ is down $1 dollar? Actually since my round trip cost is $18 commissions, I would easily be down 3% even with a 1% stop and my chance of been stopped is very high?

Appreciate your comments.

 

A good article here with the math that should answer most of your questions. The most important take away is that frequency of trading and stop-loss are dependent. If you are going to trade infrequently, then you will need wider stops. If you trade in higher frequency, then you can lower the stop-loss and it may also be a good idea to do that to avoid large losses.

Take a look at this recent article from same expert where talks about a system that trades dow stocks with 0.033% position size per stock but apparently no stop-loss. System trades about four times a day but the high diversification keep overall drawdown low. If you are going to trade just one security then you are not diversifying risk and position size may not help no matter how small.

 

That depends on how much you have in your account, doesn't it?

The scenario you envisage would arise only if you do the opposite to what I've suggested above, and allow your position-size to determine your stop-loss distance; what you ought to do is determine the position of your stop-loss in accordance with the chart and your trade-management plan, and then derive your position-size from that.

A small retail trader with an account of $1,000 is undercapitalised to be trading in shares that cost $100 each.

The 1% being discussed here (which was not my figure, by the way) refers to the risk exposure on an individual trade (i.e. the proportion of your total account that can be lost if the trade turns against you and hits your stop-loss), not to the potential change in value of the instrument traded.

 

From what I've read you should do around 1% to 2% of your capital. Say if you have $100,000. 1% of that is $1,000. Now say there is a stock trading at $100 a share and you put a stop loss at $90. $100 - $90 is $10. You are willing to risk $10 a share. To keep that 1% risk you take $1,000/$10 which equals 100. You can buy 100 shares of that stock with a 1% risk. I'm new to this so if I'm completely wrong please let me know. I'm still learning how to swing trade =/