Take The Risk!

[Grey1]

Spot on jonny 40

 

[ChartMan]

The optimism bit was related to "guessing the market direction". Not in as in your your general state of mind. Clearly one needs to be optimisic about the outcome of a trade and even about the point of entry of a trade.

 

[Grey1]

There are three kind of players in the market

1) Those who want to achieve MORE with MORE risk (Brave Gamblers.. This Guy just wants to buy that Porsh or get some of his losses back )

2) Those who want to achieve LESS with LESS RISK ( Scared Gambler .. LOL This guy just wants to pay his bills )

3) Those who want to achieve MORE with LESS RISK ( professional Traders .. They treat this game as a business )


WHEN RISK BECOMES PROPORTIONAL TO REWARD THEN YOU ARE GAMBLING

 

[al-motor]

well said Grey......... I think sometimes the beginners get carried away in just taking pot luck and HOPING for the best- treating this like the casino !

Al

 

[grubs50]

Any serious trader would treat it as a business but it will be pure fallacy if we all pretend to ALWAYS adhere to some rule (in term of R:R, money mgmt, etc)...........it is easy to pontificate on a BB but who knows what each individual gets up to in the privacy of their office or home.

 

[Grey1]

grub,

Which would bring me to the 4th deduction,

IF the Traders did not know where they stood with the market ( price Wise ) they would never know if they were taking more or less risk ..

 

[peedee]

Ill go with grubs on that one, 1-2%/trade though, im not saying i disagree with this approach but how many trades does somebody need to get it right.

 

[grubs50]

Isn't that the point of trading in the first place? it isn't an exact science despite all TA , FA and so called purveyors of the holy grail like Vince Stanizone and other tutors. The bottom line is understanding the market u r trading.

 

[peedee]

Definately!

 

[CityTrader]

Isn't that the point of trading in the first place? it isn't an exact science despite all TA , FA and so called purveyors of the holy grail like Vince Stanizone and other tutors. The bottom line is understanding the market u r trading.

Spot on- if you have the utmost conviction in your abilities, then why limit yourself to some arbitrary rule ( where on earth did this 1 -2 % theory ever come from?)

I have no hesitation what-so-ever in backing a trade I believe to be right- sometimes upto 65% or 70% of my trading capital. If I had less trading capital then my position would be even larger percentage. I look at the trade, asses the risk /reward on the size of my trade- Never, ever think this is x%'age of my capital

Wayno

 

[Grey1]

City

Let me clarify the 1% tolerance to risk which often is not explained properly ,

The 1% rule says never risk more than 1 % of your total capital in any trade ..
How ever this has two different implications

1) Never trade more than 1% of your total capital on ONE STOCK just incase the company you are trading ceases trading or collapses in the price to an un tolerable level.. I am sure you remember Few stocks vanished totally from the market even though they were tipped by paul Kavanaugh ( King of FA at the time ) .. This is called Capital Risk .. According to above concept if you had a £30000 you would be in market only $300 in each stock .. ( not practical is it.. unless you have a huge pocket ).. This is the principle of non systematic diversification.. Never put all your eggs in one basket sort of theory..

2) Never allow more than 1 % stop loss in any trade.. So with $30000 Capital you would have the MAX stop loss of $300 ( Trade Risk ) but you would ignore the diversification concept explained above..

The first concepts relates to number of stocks while the second refers to Stoploss..

regards

 

[peedee]

At the moment Wayno i risk about 20%, and i cant see the problem with that, its my own comfort zone. Maybe in the future it will be more. I dont consider myself some kind of irrational manic gambler, it boils down to my W/L ratios.

 

[CityTrader]

Grey1 - I understand ( even If I choose to ignore it) the 1% rule, just wondered who came up with it? !!!

My risk management is much more ad-hoc. I look at my stop losses on an individual stock on a MONEY basis, not on a percentage of risk capital. I really don't imagine my way of doing things would suit many people, but for the sake of intellectual discussion thought it worth mentioning.
( for example if I buy 250,000 Woolworths, I'll watch the trade, but would probably limit my loss to £10,000 which sounds like a lot of money - but in reality I'd take my profits and losses a lot quicker if the stock wasn't behaving as I expected - but if still believe in my position I try not to cut a trade because it's breached my mental stop loss- just because the whole market is having a bad day)

 

[Grey1]

City,

Lets assume you want to take the risk and put all or most your eggs in one basket..In this case the diversification is some thingyou donot believe in .. fair enough ..

However the reason mathematicians insist on 1% or 2% in each trade is to allow for your system edge to kick in ..

In another word if you have a 60/40 system , and allow a 2% risk in each trade then before your capital vanishes your system edge has taken over and you come on top eventually..

THIS IS WHERE THE 1- 2% comes from

 

[grubs50]

At last............. nice to see someone being upfront for a change instead of trying to be part of the crowd.........good on u, city trader..............a lot of 'experts' like to bandy theories about as if we have to live and die by them

 

[peedee]

Grey1, im not trying to rubish your post but trading is a mixture of different aspects, but if somebody is getting it wrong so many times its got to be back to the drawing board.

 

[Trader333]

peedee,

Are you honestly saying that you have a trading method that will never see 5 consecutive losing trades ?


Paul

 

[peedee]

YEH! its called not day trading, Paul.

 

[Trader333]

peedee,

So what ? let me ask what the drawdown is then because it is just as easy to have 5 losing trades position trading as anything else.


Paul

 

[Grey1]

Grey1 does not get annoyed with his fellow traders having a go at him coz , he only expresses knowledge for those who are interested .

Grey1 is glad to have answered his fellow trader CITY the reasoning behind the 1-2 % rule ..

Grey1 encloses this simple Spreadsheet with the permission of his good friend Malcolm ..