I'm reading this book. It mentions a novice trader should risk 2% of account equity per trade and only the experienced trader should attempt to go above 2%. Any thoughts? http://www.amazon.com/Traders-Money...7719/ref=sr_1_1?ie=UTF8&qid=1296396979&sr=8-1
The 2% is way too much especially for intraday traders. The 2% rule was first mentioned in the book Market Wizards by trend followers. They started with 2% and then if the trade went in their favor they added to positions. If you day trade and something goes wrong and out of 20 intraday trades you lose money in 15 you can end up with a 20% drop in one or in a few days. You don't want that to happen. Also watch out, many book authors have no trading experience at all, I mean maybe not even a single profitable transaction. I don't know about the particular book author. I don't buy books because eveything you want to know is publicly available for free, I mean it costs nothing. These are a couple of links with good information on the subject: http://www.tradermike.net/2005/07/position_sizing/ http://www.priceactionlab.com/Literature/PositionSizing.pdf
The Elder guy who says 2% risk per trade also says max loss per month is 6%, so if you hit 6% loss stop trading for that month or paper trade, reassess, etc.
I'd say 2% is a lot for a daytrader to risk on one trade. It depends somewhat on the market and on your methodology. They get the 2% from risk of ruin simulations. For example, a system with a 50% win rate has a very high probablity of having 10 losses in a row at some point during the year. As the other poster noted too, when you're daytrading stocks, your risks tend to be correlated, ie you might be risking 2% on 10 separate trades which will probably all go in the crapper simultaneously. So are you risking 2% or 20%? I'd say the latter. At the same time, using too tight a stop loss will guarantee a series of small(er) losses. There is a delicate balance. You find it through experience or backtesting. When I was starting out, i read a lot of similar books. It was always frustrating to me that the authors always seemed to harp on risk control, discipline, cutting losses, etc. I wanted to know the magic formula for buying when the red line crossed the blue line. It took me a while to appreciate the wisdom of what they were preaching.
You're asking the wrong question. The right question is "which stop loss value (if any) gives your strategy a positive expectancy?" Ninna
2% on DEMO account, until he's consistently profitable (not to be called a newbie). Then start with very small risk on real (like 0.25%) and slowly increase. Otherwise emotional issues will show their face and will lead to losses.
There was a trader on here that did a journal and did 1-2% trading currencies. I'm sure it was discretionary capital, but regardless he did very well. It's all about that strategy, how important the money is, and like someone mentioned....the expectancy. He was pretty dialed in though. No big losses and some huge gains via trailing his stops. I do about .5%.
"When the red line crosses the blue line"... that's what we all WANT... especially noob traders. Something simple, clear cut, and profitable a high percentage of the time... And when we can't find that Holy Grail, many of us claim, "TA doesn't work". KISS is the right approach, but it's not THAT simple. When we get to hear the truth from successful traders, we find: 1. A 52-55% win rate is about the max. <50% win rate can be profitable, too. 2. "80% of profits come from 20% of trades".... which is why managing risk to preserve capital is so vital to long-term success.
to me what matters more is age, account size. if you are young and have a small account then gamble...risk almost everything until you have a bankroll.