What is a sensible level of risk???

[nathan88]

Hey guys

I am new to trading and am at the moment doing some studies before jumping in. I am familiar with the concept of trading with a risk reward ratio but am unsure as to which level i should set my risk. I will be starting off with swing trading. I will be using a leveraged account with a 5% margin and plan on being a pretty conservative trader. I am trying to come up with a trading plan and was thinking that my risk or R would be set at the 5% of the stock value. eg. if it was a $100 stock my stop would be set no lower than $95, which if i stopped out would be kind of like losing my own money (if i avoid slippage). is this a sensible strategy and should i look ONLY for oppurtunities where this is possible or is this a bogus concept???

i have watched some training videos but they did not mention this.

 

[dbphoenix]

The so-called "risk:reward" ratio is an illusion. Unless you have some way of determining the probabilities of reaching your reward and of paying your risk obligations, there's no point in fooling with it.

Study whatever it is you're planning to trade. How does it move? How far does it have to move against you before you know you're wrong? If that's more than you want to pay, find something else. Otherwise, you know have a practical measure of your risk. Whether or not you are willing and able to assume that risk is another matter.

 

[forker]

its only an illusion when you are dealing in probabilities

 

[nathan88]

The so-called "risk:reward" ratio is an illusion. Unless you have some way of determining the probabilities of reaching your reward and of paying your risk obligations, there's no point in fooling with it.

Study whatever it is you're planning to trade. How does it move? How far does it have to move against you before you know you're wrong? If that's more than you want to pay, find something else. Otherwise, you know have a practical measure of your risk. Whether or not you are willing and able to assume that risk is another matter.

Thanks for the reply. i have been looking at finding and trading between trendlines which have a reasonable probability of being hit judging from previous swings. so i guess if this probabilty of trendlines being hit is likely to reach 2x the initial risk amount then these will likely be stocks that i look at trading meaning that my success rate needs only to be 33% to break even. i have done some backtrading looking at my peremetres and think that a 33% success rate is highly achievable.

Can i ask what is your risk management and your trading plan? do you have certain guidelines as to what is probable to be a successful trade. I just want to clarify that i am on the right track. you can PM me if u like.

Thanks

 

[dbphoenix]

Whether or not your trendlines turn out to be reliable over the long haul will depend on how they're drawn. What will most likely matter more are the swings, largely because everybody can see the swings but only you can see your lines.

As for my risk management and trading plan, click the first link below. But whether or not you are on the "right track" will depend on your goals and objectives.

 

[tomorton]

All good rational advice above.

When you eventually select a method, don't forget the pillow test - "Can I sleep soundly with this level of risk?"

 

[progix]

In my opinion, the sensible and acceptable level of risk is that amount which we can afford to loose.

 

[dbphoenix]

In my opinion, the sensible and acceptable level of risk is that amount which we can afford to loose.

Not if the trader is virtually guaranteed to lose it.

 

[JanetW87]

I'm also new so I do not have a firm grasp yet but I expect that sensible level of risk is basically a calculated risk. In other words, the risk you are willing to take and can afford to cover it if the strategy fails. So probably you should first set your boundaries of losing and always remember that each potential 'deal' carries an opportunity for losing. This is not to get carried away by "gold-looking" catches.