Risk limit means the maximum percentage that a single position can take up in your portfolio or net-worth. There's no right answer to this question because a lot of it is personal preference. I would like to know what is the risk limit used by elitetraders here which I can use as a guideline. It's good to hear from those who are more experienced.
Currently 1.5%. In the past I have been as high as 5% but only in special circumstances. Hoping to get back into that territory as a matter of routine. I don't often lose the full risk capital: usually find I can close a weakening position on TA before it hits the SL.
At 1.5% risk limit, you have around 67 stocks in your stock portfolio when you are fully invested, assuming you are a stock trader/investor. That's quite a lot of diversification. May I ask how long do you hold your position on average?
At less than 1%, you are holding more than 100 stocks when you are fully invested. That sounds to me like a lot of diversification. Good thing is you'll never be ruined.
I haven't traded stocks for a few years now, I am exclusively trading in forex. I am in the UK so subject to ESMA rules on leverage - 1:30 is the max. For better or for worse. As an aside, I don't believe you can get true diversification in stocks anyway, its a mirage sold by stockbrokers who want everybody to buy lots more stocks.
Would you mind explaining what do you mean by 1.5% risk limit in forex? For stocks, 1.5% risk limit means the position size of each stock is 1.5% of the entire stock portfolio. This works out to about 67 stocks in the portfolio. There are not that many currency pairs to build a forex portfolio. I am confused here. Thanks.
Sorry, yes. The 1.5% risk is the maximum loss from account capital incurred if the stop-loss is hit. As I say, I can usually exit before the SL is hit as TA worsens, but 1.5% per trade would be the worst case scenario (barring exceptional price moves that jump the stops). Its a difference in calculating risk. If you put 100% of your capital into one stock bought on the same day, you could say that your risk is now 100%. Actually, risk is usually calculated as the loss incurred if the stop-loss is triggered, and this can be whatever % of your account you decide.
I understand you clearly now. If you have a string of losses, say 5 times in a row, the worst-case damage will be 7.5% of your equity. Pretty painful. I guess for those elitetraders who use a high risk limit above 1.5% or even 5%, the hit-rate (probability of being right) needs to be pretty high. Otherwise, the drawdown can be psychologically very painful. For stock traders with a stock position that takes up 1.5% of the portfolio, setting 10% cut loss means they are risking 0.15% of the portfolio. Much less painful when they lose but the question is are they over-diversifying?
The 2% rule is very applicable to short-term multi-day traders, not necessarily scalpers and other intra-day-traders. The rule I was taught for long-term shareholding was 10%.