Me personally, I like to risk 2% of total equity on every trade. No matter what the broker allows, I allow one es for every $5,000. So with $25,000 you can either trade 5 lots with 2 pt stops or 1 lot with a 10 pt stop. Either way it still comes out to 2% of total equity. I've never tested. Wouldn't know how to. But I suspect over time both ways would come out the same. (less com with a 10 pt stop, but I could argue the farther you look ahead the harder it is to see. But I could be proved wrong on that one too.)
Then again, I guess you could go out on daytrade margin with 25k put on 20 lots with a 1 pt stop. Lord knows I wish I'd done that when the market is trending.
Keep in mind worst case scenarios. If a "surprise" on the wire caused the market to quickly trade 20 lower and particularly if there were a lot of sell stops residing on Globex your 10pt. loser could be 20 (or more) and your 2 pt. loser 10 times what you expected. With one contact at least your pct. loss would only jump from 2% to 4% but with 5 contacts you would lose 20% of your account in one blip. And what I'm describing is not pie in the sky pessimism (oxymoron?). At least once a year something, i.e. fed move ect. moves the market in like fashion. In fact the NQ has moved 50pts. in a clip a few times in the last year for NO reason. Just because of a bunch of stops got elected into a temporary vacuum. Lord knows that an assassination or terror or whatever could wipe out many of us over leveraged thrill seekers(myself completely included). The more you have the less pct. you should risk. The most nonsense statement ever made from Livermore was "that if all I have is a million and I risk it all , it is the same as someone who only has a thousand risking it all". Nonsense. Try driving a cab and saving up a mil so you can get another stake. One can always take inordinate pct. risk with a few thou. It's easy to come by. But IMO if your account is in the tens of thousands, let alone hundreds of thousands or millions, your risk as a percentage should be cut,cut,cut! And not what you perceive as risk but what historically( more then the last few sessions) has been worst case.
I tried placing 1 or 2 pt stop, but I got frequently stopped out even I bought(shorted) at bottom (top) in the SP500 intraday chart. I trade a 1 lot of ES at a time. Would like to know from experienced ES trader what would be the optimum stop for ES!
reply to: 1 point? $50/contract (eg es). How do you manage the small stop without getting bounced out? If it's so easy to get stopped out at a point, how come it's so hard to always make 1 pt profit? I use 2 pt stops and I get stopped out a lot. When I use three point stops, it's about the same, only I get stopped out for 3 instead of 2. My guess is, it's all just a mind game. You can think about stops too much, and then every thought starts out with "if the market moves against me." I like to devote at least half of my attention to, "and if the market moves in my favor."
You've got the 2% rule right, but you're overlooking another vital concept to survival. If you want to survive in this business, you'll want to obtain a 3 to 1 ratio on every successful trade. You won't do it every time, but that's what you need to shoot for. So, if your risking 10 handles on a trade, you'll need to make 30 handles. Not an easy task. If you risk 2, you'll need to make 6 handles, etc... Keep this little fact in mind...If you maintain a 3 to 1 ratio you can be wrong 9 out of every 12 trades and still break even. Hope this helps
I usually risk 6 to 7 ticks at most. Why? Because I have to average a 3 to 1 ratio to survive. If you use a 3 or 4 handle stop you have to make 9 to 12 handles. Some people feel a 2 to 1 ratio is all that is needed, but myself and many others feel 3 to 1 is best.