2% stop loss rule

olionion said:
I can understand why but wouldnt shrinking the risk be counter productive assuming R:R are related, you wont be using the extra capital?
Click to expand...

Smaller bet size means smaller drawdown. If one can generate enough income by making 10%/year with a 10% drawdown (for example), it becomes easier to stick to the rules and stress is lower.
 
meanreversion said:
This seems confused. Why is betting 2% of equity each time going to wipe you out?

Your second paragraph seems to agree with a fixed percentage bet size?
Click to expand...

Let's assume what I am saying is correct - that by simply placing a stop at a point where only 2% of your capital is at risk (in other words, ignoring all forms of technical/fundamental areas of support and resistance), you have a low probability of success of the trade working out. Then, over a succession of trades, you will get wiped out by getting stopped out more than often than not.

You can argue that this depends on the ratio of win size to loss size. That is, if your winners are greater than your losers, then you can come out on top in the long run. While that holds mathematically, I propose the following counter argument: if 90% of traders consistently lose money, then the majority cannot achieve large winners and small losers. Thus, if the 2% stop loss is constant for every trade and winners are not larger than the losers, then the majority of traders who place stops at areas where only 2% of their capital is at risk will eventually blow their accounts.
 
amit1986 said:
Let's assume what I am saying is correct - that by simply placing a stop at a point where only 2% of your capital is at risk (in other words, ignoring all forms of technical/fundamental areas of support and resistance), you have a low probability of success of the trade working out. Then, over a succession of trades, you will get wiped out by getting stopped out more than often than not.

You can argue that this depends on the ratio of win size to loss size. That is, if your winners are greater than your losers, then you can come out on top in the long run. While that holds mathematically, I propose the following counter argument: if 90% of traders consistently lose money, then the majority cannot achieve large winners and small losers. Thus, if the 2% stop loss is constant for every trade and winners are not larger than the losers, then the majority of traders who place stops at areas where only 2% of their capital is at risk will eventually blow their accounts.
Click to expand...

I'm still lost. What is the connection between how much you risk and where areas of support and resistance are? If they are close, you bet more per point than if they are far away.

Your second paragraph makes no sense at all. I would agree that the majority of traders probably aren't achieving big winning trades and small losing trades, but what does this have to do with how much is bet at each time?

Are you confusing % equity staked with % distance to the stop?
 
meanreversion said:
I'm still lost. What is the connection between how much you risk and where areas of support and resistance are? If they are close, you bet more per point than if they are far away.

Your second paragraph makes no sense at all. I would agree that the majority of traders probably aren't achieving big winning trades and small losing trades, but what does this have to do with how much is bet at each time?

Are you confusing % equity staked with % distance to the stop?
Click to expand...

Yes, my mistake. I suppose what I should have said is this: first identify where the appropriate stop loss should be based on chart patterns and/or fundamentals, then adjust position size such that your stop takes account of those areas AND risks no more than 2% of your capital. Don't just buy/sell a fixed contract size for every trade and throw a stop in the market only based on the 2% rule.

Thanks for clearing that up :clap:
 
I had been quietly sitting here reading this thread and I was just about to pull my hair out till the last couple pages. Thank you guys for bangin this out.
 
Depends on the underlying liquidity of the instrument traded; you could work with a tighter stop on EURUSD than say CHFUSD.
 
meanreversion said:
You must be chucking around some big size if liquidity in USD/CHF is an issue for you.
Click to expand...

Chfusd he said. That well known currency cross. Sometimes I trade £1 a point and the Market goes my way, so I must be moving the Market. I struggle to move it on eurusd though. I think he has a point.
 
haha stop it

i didn't have the heart to point out that it's not chfusd

still seems that people are struggling with the difference between % account risked and % distance to stop!!
 
on a tick by tick basis the swiss future moves less than the euro future so can have more contracts for 2% of account... of course are differenct currencies tho!
 
Hi There,

I`m new to this forum and this is my first post. I`ll give a brief history of the rollercoaster I have been on for the past 12 months and maybe you can then give me some much needed advice.

In May last year I had just set up a barclays stockbroker and marketmaster account. I put £120k into the account and started looking for a trade that I thought would make some big money.

I bought covered call warrants for BHP Billiton for June 2011expiry with a strike price of £25 and a parity of 0.1. They were about 15 pence each and I bought about 300,000 of them. During June the market started falling and BHP`s share price dropped a fair bit, with the covered warrants (essentially the same as options - only priced by a market maker) fell heavily, to about 8 pence each. I averaged down and was sat with 800,000 covered warrants. They went up again to about 12 pence and I thought about getting out, but when I tried to sell, the market makers dropped the price and i was essentially screwed over by them. Not learning my lesson, I bought more when they dropped back to 8 pence and at the highest point i had 1.2 million of them.

They dropped to a low of 3.5 pence and I was utterly gutted by this stage. I rode them back up to 9 pence and eventually got rid of them all for an average just over 8 pence, meaning a loss of about £25k

Like a fool I watched copper go through the roof and eventually BHP were trading at £26 when the covered warrant price was at 31 pence. I was constantly calculating what I could have made and it was driving me mad. The bottom line was that I had badly over extended myself and did not have the balls to sit with the risk, thus I sold out when I got back (from 3.5 pence) to a level where i still had a decent bank (95k).

Then I started spreadbetting, slowly at first, with 1.5% maximum risk per trade. This was in October of last year. I was not making money fast enough (Greed and stupidity really) so i started going for some crazy Ivan trades. I has £50 a point on natural gas and saw it go from £4.37 to £4.00. Suddenly my bank was down to under £80k, but this time I stuck with it and eventually sold out on gas at £4.67, making a nice profit. With this and other trades (oil, gold, GBP/NOK) I got the account upto £125k (this was about two weeks ago) but it was not through any system, just pure luck and by this time I was trading without stops as I kept getting stopped out and then seeing the market go up again afterwards.

Greed took over and I decided to buy heavy into Gold as I has seen it drop to about 1,370 from about 1,420. I bought £10 a point, then some more when it dropped again, then some more etc etc. I ended up with £49 per pip at an average of 1,365. When the price started dropping like a stone, that same feeling of guilt, regret and self loathing crept in (much like the BHP scenario) I sold out on a low and wiped out almost £40k in one go.

The bottom line is that I have about £85k left, which is lucky considering the way i was carrying on.

I realise that I have no discipline, no system and most likely a bit of gambling problem.

What I want know is a steady system that I can follow to the letter, applying a max risk of £1000 per trade (approx 1.2% of my bank) in order to slowly build up my funds again.

I want to be able to sleep at night, not check the prices every 5 mins to see if it has moved, I want an emotionless system that i can live with and not dictate my life.

The last 7 months have been hell in truth, the guilt is the worst, looking my wife and kids in the face knowing I am simply pissing away so much money with unfounded speculation.

Does anybody know of any systems out there that fit my requirements? Something that protects downside and build profit over years, rather than weeks.

I have learned the hard way that discipline is the key to trading, in fact it must be the only way.

Any tips/insight and advice is greatly appreciated. I believe I can follow a system, where trade alerts are given and a strict stop loss format is in place. Such a system would give me the peace of mind (I think) that I am looking for.

Thanks Guys.
 
My suggestion would be to start reading some books on trading and stay out of the market until you understand trading.
 
Trend following is what you want. But read 'Trade your way to financial freedom' by Van Tharp before betting any more money.
 
Blaiserboy said:
My suggestion would be to start reading some books on trading and stay out of the market until you understand trading.
Click to expand...

Ditto to that comment and props for outing such a loss on the interweb.. fwiw you have enough capital to justify taking your time, put it all in a low/zero risk investment for a while whilst you study and learn how to trade, then once you have a system with a positive expectancy start phasing in the real $$$.

Also as a general observation a lot has been said in this thread about the importance of the % you risk in any given trade, but this is only part of the jigsaw puzzle and wont necessarily mean you will make money and wont stop you from going broke, you need to have a good set of historic results to ensure that you have equity overall in your method of trading and that the probability of your way of trading hitting its target price compensates and exceeds the probability and amount lost when your risk is taken from you. imho you need a pretty big sample size if you only have a small edge, ironically by the time you have this sample size you will probably either be broke or rich :whistling
 
forcefraser said:
Hi There,

I`m new to this forum and this is my first post. I`ll give a brief history of the rollercoaster I have been on for the past 12 months and maybe you can then give me some much needed advice.

In May last year I had just set up a barclays stockbroker and marketmaster account. I put £120k into the account and started looking for a trade that I thought would make some big money.

I bought covered call warrants for BHP Billiton for June 2011expiry with a strike price of £25 and a parity of 0.1. They were about 15 pence each and I bought about 300,000 of them. During June the market started falling and BHP`s share price dropped a fair bit, with the covered warrants (essentially the same as options - only priced by a market maker) fell heavily, to about 8 pence each. I averaged down and was sat with 800,000 covered warrants. They went up again to about 12 pence and I thought about getting out, but when I tried to sell, the market makers dropped the price and i was essentially screwed over by them. Not learning my lesson, I bought more when they dropped back to 8 pence and at the highest point i had 1.2 million of them.

They dropped to a low of 3.5 pence and I was utterly gutted by this stage. I rode them back up to 9 pence and eventually got rid of them all for an average just over 8 pence, meaning a loss of about £25k

Like a fool I watched copper go through the roof and eventually BHP were trading at £26 when the covered warrant price was at 31 pence. I was constantly calculating what I could have made and it was driving me mad. The bottom line was that I had badly over extended myself and did not have the balls to sit with the risk, thus I sold out when I got back (from 3.5 pence) to a level where i still had a decent bank (95k).

Then I started spreadbetting, slowly at first, with 1.5% maximum risk per trade. This was in October of last year. I was not making money fast enough (Greed and stupidity really) so i started going for some crazy Ivan trades. I has £50 a point on natural gas and saw it go from £4.37 to £4.00. Suddenly my bank was down to under £80k, but this time I stuck with it and eventually sold out on gas at £4.67, making a nice profit. With this and other trades (oil, gold, GBP/NOK) I got the account upto £125k (this was about two weeks ago) but it was not through any system, just pure luck and by this time I was trading without stops as I kept getting stopped out and then seeing the market go up again afterwards.

Greed took over and I decided to buy heavy into Gold as I has seen it drop to about 1,370 from about 1,420. I bought £10 a point, then some more when it dropped again, then some more etc etc. I ended up with £49 per pip at an average of 1,365. When the price started dropping like a stone, that same feeling of guilt, regret and self loathing crept in (much like the BHP scenario) I sold out on a low and wiped out almost £40k in one go.

The bottom line is that I have about £85k left, which is lucky considering the way i was carrying on.

I realise that I have no discipline, no system and most likely a bit of gambling problem.

What I want know is a steady system that I can follow to the letter, applying a max risk of £1000 per trade (approx 1.2% of my bank) in order to slowly build up my funds again.

I want to be able to sleep at night, not check the prices every 5 mins to see if it has moved, I want an emotionless system that i can live with and not dictate my life.

The last 7 months have been hell in truth, the guilt is the worst, looking my wife and kids in the face knowing I am simply pissing away so much money with unfounded speculation.

Does anybody know of any systems out there that fit my requirements? Something that protects downside and build profit over years, rather than weeks.

I have learned the hard way that discipline is the key to trading, in fact it must be the only way.

Any tips/insight and advice is greatly appreciated. I believe I can follow a system, where trade alerts are given and a strict stop loss format is in place. Such a system would give me the peace of mind (I think) that I am looking for.

Thanks Guys.
Click to expand...

this is a classic set of misstakes: averaging down (don't!), not having a trading plan (gambling! relying on luck!)

If you're into medium term timescales (1-3 month trades), and like stocks, I highly recommend reading the NakedTrader book (http://www.amazon.co.uk/Naked-Trader-Anyone-Trading-Shares/dp/1905641516/ref=dp_ob_title_bk).
 
leonarda said:
this is a classic set of misstakes: averaging down (don't!), not having a trading plan (gambling! relying on luck!)
Click to expand...

Yes, all the main cognitive biases are represented.

Actually, I'm wondering if the post is a fabrication, who in their right mind would sign onto a trading forum and immediately bare all??
 
hi :)

your account size doesnt make you any different from anyone else starting out in trading for me. maybe you have different aims or risk tolerance than most people spreadbetting on their credit card, but i think the steps you need to take before you can safely trade your won money are the same.

see at my blog for helpo for learner traders :) its a work in progress :)
 
meanreversion said:
Yes, all the main cognitive biases are represented.

Actually, I'm wondering if the post is a fabrication, who in their right mind would sign onto a trading forum and immediately bare all??
Click to expand...

It`s no fabrication mate, I don`t have a problem in being upfront about what I have done.

I see no point in pretending these things have not happened and if I can`t be honest enough to own up to them, then shame on me.

I was simply looking for advice, as it is plainly obvious that I need it.
 
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