Beginners should risk only 0.25 % per trade

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foroom lluzers

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We should all know the 2% rule. Devised by Dr Alex Elder. Says capital risked per trade should be not more than 2% of your total account.The 2 % is fine for experienced and skilled traders ,but IMHO average traders should not risk more than 0.5 % per trade.

Many new traders will have a untested system/method and will be moving from method to method , until they find their comfort zone.During this learning curve , they will make a lot of mistakes , these mistakes will be additional losses , in addition to the system losses .If a method has a draw down period of 15 losses, the beginner will probably have 30 to 40 losses.

If a novice risks 2% per trade ,40 losses will amount to 80% of account.If the novice risks 0.25 % per trade , 40 losses will amount to 10 % of the equity loss .So this is sound figure to risk.

To learn about traders and mistakes , I opened a thread explaining why mistakes make losing traders .Most traders are taught to trade 2 % risk , it is poor advice in books .The best psychology threads in psychology and risk section in this forum , will also explain why wrong trading psyche can increase the number of losses for novices .

This is a great thread to read

http://www.trade2win.com/boards/first-steps/54890-why-high-probability-trading-so-important.html

http://www.trade2win.com/articles/1476-position-sizing-approach-risk-management

Hopefully this post for new traders has given those who are novices, an approach to think of risk and how much to risk.

If novice manage risk soundly , they can survive the markets , when wining trades come their way.
 
foroom lluzers said:
We should all know the 2% rule. Devised by Dr Alex Elder. Says capital risked per trade should be not more than 2% of your total account.The 2 % is fine for experienced and skilled traders ,but IMHO average traders should not risk more than 0.5 % per trade.

Many new traders will have a untested system/method and will be moving from method to method , until they find their comfort zone.During this learning curve , they will make a lot of mistakes , these mistakes will be additional losses , in addition to the system losses .If a method has a draw down period of 15 losses, the beginner will probably have 30 to 40 losses.

If a novice risks 2% per trade ,40 losses will amount to 80% of account.If the novice risks 0.25 % per trade , 40 losses will amount to 10 % of the equity loss .So this is sound figure to risk.

To learn about traders and mistakes , I opened a thread explaining why mistakes make losing traders .Most traders are taught to trade 2 % risk , it is poor advice in books .The best psychology threads in psychology and risk section in this forum , will also explain why wrong trading psyche can increase the number of losses for novices .

This is a great thread to read

http://www.trade2win.com/boards/first-steps/54890-why-high-probability-trading-so-important.html

http://www.trade2win.com/articles/1476-position-sizing-approach-risk-management

Hopefully this post for new traders has given those who are novices, an approach to think of risk and how much to risk.

If novice manage risk soundly , they can survive the markets , when wining trades come their way.
Click to expand...

Just a few pointers, because I have spend time researching this...

2% is absolutely arbitrary number, every trader should run betting size optimizations to find what is going to work best for his trading strategy (maximizing profits is the ultimate goal) - good stating point is the Kelly formula.

If you are using % for risk management, you'll never run out of money, because the amount will go down as your account goes down as well, so the following statement is not correct:

"If a novice risks 2% per trade ,40 losses will amount to 80% of account."

The novice trader should not trade live money at all until he has a robust trading strategy, do all the experiments and modelling with back testing once you have everything ready then you'll can start trading (and this will give you the confidence and take care of all mental mambo jumbo, the novice traders are so concerned about... )
 
Quantt said:
If you are using % for risk management, you'll never run out of money, because the amount will go down as your account goes down as well, so the following statement is not correct:

"If a novice risks 2% per trade ,40 losses will amount to 80% of account."
Click to expand...

I know this , it gives a rough idea of losses .
 
foroom lluzers said:
I know this , it gives a rough idea of losses .
Click to expand...

Hey man, sorry, my statement didn't came out as intended, I just wanted to clarify few point on your great post - hope the new traders will read it and most importantly think about it, before putting (losing) money on the line... Cheers!
 
foroom lluzers said:
I know this , it gives a rough idea of losses .
Click to expand...

If ~65% (the actual drawdown for your scenario) was even remotely close to 80%, I would be a millionaire by now. I agree with the intent of your post, but really even the 0.5% is completely arbitrary and not useful in my opinion. The amount you risk should in my opinion depend on factors including:

- How confident you are in your system --> should be based on backtesting and subsequent preliminary live testing.

- How much the market can accept without destroying the intent of your system. --> It is useless to size your position for an arbitrary risk value if your initial live results suggest that a certain size position reduces the strategy effectiveness. This is quite difficult to assess, but the very act of putting yourself into the market alters your strategy slightly. The point is to size your position to make this alteration insignificant. For example, it probably doesn't make sense to try and push a 1500 limit order through when the bid and ask volume is at 100 each.

- The frequency you make trades. If you make 20 trades a day, risking even 0.5% each trade may be foolish as that essentially puts ~9.5% of your account at risk each day.

- The size of your account and how much of it you can lose without impacting you. I typically only risk 0.25% or less per trade on untested systems. Really the size is determined from the expected drawdown of the system from backtests and the percent of my account I am ok with risking on the expected drawdown. So different systems may have different values.

As you can see, in my opinion there is no one magic number.
-
 
More important than what you believe you're risking is your size imo.
A trader could be long dax with a stop at -10pts / -1% of their acc, XYZ occurs and the stop gets yumped and filled at -150 / -15%.
 
Always hedge it with pork bellies.
screenshot_38.jpg

if you really drop a large bollock just hide it like F/L
You can then make 10 here and 5 there and hide ya 200 tic loss
 
Dr. Toad said:
If ~65% (the actual drawdown for your scenario) was even remotely close to 80%, I would be a millionaire by now. I agree with the intent of your post, but really even the 0.5% is completely arbitrary and not useful in my opinion. The amount you risk should in my opinion depend on factors including:

- How confident you are in your system --> should be based on backtesting and subsequent preliminary live testing.

- How much the market can accept without destroying the intent of your system. --> It is useless to size your position for an arbitrary risk value if your initial live results suggest that a certain size position reduces the strategy effectiveness. This is quite difficult to assess, but the very act of putting yourself into the market alters your strategy slightly. The point is to size your position to make this alteration insignificant. For example, it probably doesn't make sense to try and push a 1500 limit order through when the bid and ask volume is at 100 each.

- The frequency you make trades. If you make 20 trades a day, risking even 0.5% each trade may be foolish as that essentially puts ~9.5% of your account at risk each day.

- The size of your account and how much of it you can lose without impacting you. I typically only risk 0.25% or less per trade on untested systems. Really the size is determined from the expected drawdown of the system from backtests and the percent of my account I am ok with risking on the expected drawdown. So different systems may have different values.

As you can see, in my opinion there is no one magic number.
-
Click to expand...

Would you agree. , that the 2 Percent is quite high , considering experienced traders make mistakes?95 percent lose in this game ,2. Percent is part of the problem.
 
“[Michael Marcus – another top trader] taught me one other thing that is absolutely critical: You have to be willing to make mistakes regularly; there is nothing wrong with it. Michael taught me about making your best judgement, being wrong, making your next best judgement, being wrong, making your third best judgement, and then doubling your money.” – Bruce Kovner

 
EnlightenedJoe said:
Van Tharp didn't trade. This thread is blind leading the blind.
Click to expand...

Van Tharp video is professional level talk , he actually talks sense and practical reality of real trading .You don't get these pro level discussions on forums , since there are no professionals with this no knowledge.If they are blind to reality , how can they discuss reality?
 
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