That would be my maximum anticipated loss on each trade, including the possibility of the market gapping against me overnight.
Let's assume that you are a good swing trader, doing 75% plus win/loss ratio. At 1,000 shares per trade, your average trade is going to require about 40K in capital. In a normal market environment, you will be able to carry 12-15 trades, which is a decent level of diversification. At other times, your number of trades will increase, so you'll either scale back on size, or use a bit of margin. So in summary, you will want to limit each position to roughly 30-40K. If you are successful, you should be able to turn 15K-20K monthly on "average" without taking on too much risk. Unless you are highly experienced, do NOT trade options, futures, or any other vehicle that can put your capital at increased risk. You will be surprised at how quickly 500K can disappear with highly leveraged instruments in the wrong hands. If you have further questions, you can PM me.
Every level or risk has it's level of reward. If I had $500K, I would look to return 20% not so much by trading, but by a style that is a hybrid of trading and loger term holding. Saying how much are you willing to risk on each trade is much too vague IMO, and if you define a question vaguely, you will get vague answers. It depends on what your objectives are. If it were next year, I would be buying dividend paying stocks like crazy because their tax treatment are going to be incredible. How to implement this strategy correctly though is not as simple as buying them (it is for the dividend part) because having a correctly balanced core portfolio that you trade around is not trivial. nitro
Good Morning, To take that amount of risk per trade is ludicrous, & irresponsible! To answer the ? requires asking other ?s to find out, is this all just risk capital someone very wealthy, is it your retirement capital, etc. The the one must come up with objectives for the capital, what it's intended future purpose is, to produce an income stream from of x%, growth & @ what %, or how much would you like it to increase to, & in what timeframe? Then determine a strategy for obtaining this, through multiple accounts, or advisor, advisors, your own systems, or a combination of the former. To determine the risk one must determine consider these issues, & also know ones tolerance for taking risk. Higher risk should equate to higher reward, some are not not comfortable with this, & strive for consistency. Which are you? Again you could divide it up. Overall though, risking 1/2-1% per trade on numerous trades reduces the exposure to large drawdown, it could be increased up to 2%. This then limits one to having only single digit to low double digits % of portfolio risk, also referred to as portfolio heat, say 5-10%. This way should one be mistaken on all or most positions, it's not so hard to make up such small losses. When one starts risking significant amounts & has even a couple positions not work out, it becomes more difficult to overcome the losses, due to the larger % return required. A 10% loss only requires an 11% return to be even, a 20% loss equates to 25%, & it goes up considerably from there. Interesting ?, & I'm sure you'll have varying replies. Good Luck & God Bless You! Kelly
You must have a realistic business plan in place. What do you expect to achieve per month, per quarter, per year, per 5 year stretch, etc. What are you willing to risk and drawdown? Don't be lazy. Write it down. You should definitely decide right here and now what your emergency plan is. That is, how much you will risk losing in case you don't do well. Many traders fail to do this and end up losing it all. If you lose, say 10% of your account, you need a break. If you lose another 10%, you need a longer break. If you lose another 10%, quit. Close the account. You are not meant to be a money manager. Your clients will thank you for it and you will keep your head. Consider: A 10% loss requires 12% gain to get back to even A 20% loss requires 25% gain to get back to even A 30% loss requires 43% gain to get back to even .... after this its a long struggle to get back and you might as well hand the money back to the client .... A 40% loss requires 66% gain to get back to even A 50% loss requires 100% gain to get back to even Open up at least 2 margin accounts and equally distribute the funds in each account. Keep it small because you don't want to screw around with doing tax returns and dealing with too much paperwork. Have at least 2 because if you can't contact your first broker (online probs, etc.) you need a emergency route with your other broker to place orders against any existing positions to prevent loss (yes, it does happen). Next, decide on the instruments you want to trade. Stay away from thin trading stocks less than, say, 500,000 shares on average a day. Stick to the more active issues with higher volume to avoid loss in spread. You will be able to trade in and out within pennies. Make sure the issues are tolerant of your CLIENT'S risk and expections - not yours. Whether you want to believe it or not, you'll have to learn that lesson the hard way. Make sure you client understands this or you'll end up with no client at all. How much you make will depend on the volatility of each issue and your picking the right direction. Trade issues above market volatility and lean toward ETFs. I don't want to spend my life in front of a computer monitor all day watching wiggles and getting into a daytrader/scalper mode - its not my style. Know your style of trading and go with it. But realize, the more transactions you make, the more commissions you will rack up. There will be a tendency to overtrade and if you are not discipline to restrain yourself when you are losing, you're emotions will kick in and you will likely just blow up. Frankly, scalping is a losing method and daytrading will soon be as well as the volatility gets cranked down along with the patterns to force one to hold overnight. As of how much to risk per trade, keep it simple and use equal distribution percentages. I'd say to risk no more than 10% per position. You don't want to overdiversify nor do you want to underdiversify. You also want to have, say, 25% of cash available at all times for new trading opportunities. This is an important point because if you get really agressive with placing 50% or more in a position, and it blows up against you, your going to go home with your tail up your butt as a loser. Assess each trade with whatever criteria you want to use. If its the moon lining up with Uranus. then use it. Whatever fits your fancy. And no, I'm not about to go on about what is it I look for in a trade and start off a brainstorming session in that regards. Very few are going to give you their edge - that's wishful thinking on a website with 20,000 traders. Having grandiose ideas of taking $500K of capital and playing the market should not be for the thrill of a gambling itch. If you don't have a trading edge before coming into this and are not well prepared, you are going to toss all of it down the drain before you even start. My best advice is to plan ahead, create rules, and stick to them.
Well, you did ask for different perspectives so here's mine. I think you might be better off at the end of a year if you put the money into a savings account.
There are some interesting posts here. Something I have been wondering is how difficult it is to maintain a 3-5% average return per month on an account like this or above 1M. Someone says risking 25K per trade is ridiculous.It depends on what you call your risk, I don't trade stocks much but when I take a position in an individual stock, the risk I look at is a 50% loss, that is the stock gapping 50% against me . I don't know how you can say I risk 2% per trade, even in the futures market you can't say that. Your max risk is much larger.
You misunderstood the original question - he didn't ask how much an average conservative investor would risk, or how much you personally would invest. He was asking us each to give the amount we would each personally risk. I personally risk 2-5% on my main trading positions, so that is the answer I gave. As for the various money management points you made, I am aware of them. My position size is not plucked from thin air, but is rather the result of careful calculation based on my typical win rate, reward-risk ratio, the Kelly Risk of Ruin formula, my preferred maximum drawdown exposure, and a risk assessment of the likelihood of my edge deteriorating before I realise it. The 2-5% is based on my assessment of the *maximum* likely loss on any given position - i.e. if the market gaps significantly you against you on major shock news, not just if your stop gets hit. Also bear in mind that I dynamically adjust my bet size when I am in a drawdown, so if I was down more than 7-8%, I would be making 1.5-3% bets, not 2-5% bets, and if I was down over 10% then I would bet 1-2% max. Below 15%, I would go down to 0.5-1%, and below 20% I would bet 0.5% max. As for objectives, mine is to average a compound return on my net worth - net of all expenses and taxes - of at least 30% per annum. Generally it is not possible to achieve this with my approach by risking 0.5% per position, or by using outside managers.