Why only 1% Capital Risk when trading

[Gardan]

Yes.

Don't know. I wasn't in the market at that time...if it hadn't been 9/11 it would have been something else...

The point is, you can plan your trading on never having a 9/11 and make mega bucks until it does occur - or factor the possibility of a 9/11 into your trading plan.

The first approach will have you exceeding all your contemporaries' performance - the second will have you staying in the game.... your choice.

BTW Rooney is CRAP...

So is it prudent to factor in say a possible 20% (911) hit on all your open positions or more?
Is anything over 50% getting to the " Time to get in the coal bunker stage"

Re: Rooney, as a Liverpool fan , when we kick are Mancunian Neighbours ar*s'es off the field on Saturday, I hope Fergie plays him in the same position he played last night.
But Please,Please, lets keep to this very important subject.

 

[TheBramble]

So is it prudent to factor in say a possible 20% (911) hit on all your open positions or more?
Is anything over 50% getting to the " Time to get in the coal bunker stage".

Gradeon, look at it like this.

How many positions would you need to have open at any one time, for a flock of Black Swans to sail into view (as per $60 to $10 example given above) for you to wish your exposure had been lower?

I'm not trying to be deep, but everyone's risk profile and comfort level is different. I never have more than 10% in the market at any one time and my risk per trade is normally WAY less than 1% which is my absolute MAX.

I consider I am VERY risk averse. But I didn't start that way...

 

[Trader333]

Just another excuse to trade Forex!

Quite possibly but I dont like trading markets where I have no way of measuring volume.


Paul

 

[Salty Gibbon]

Is the risk any less with things like QQQQ and SPY ?

 

[Gardan]

Gradeon, look at it like this.

How many positions would you need to have open at any one time, for a flock of Black Swans to sail into view (as per $60 to $10 example given above) for you to wish your exposure had been lower?

I'm not trying to be deep, but everyone's risk profile and comfort level is different. I never have more than 10% in the market at any one time and my risk per trade is normally WAY less than 1% which is my absolute MAX.
I consider I am VERY risk averse. But I didn't start that way...

Tony,10% of your total unmargined capital? just wish to get any info clear here, free, rather than the expensive fees the Markets charge. Could probably push to a beer.

Black Swans, one would be dreadful, two....oh dear! , get your point.

 

[Gardan]

Is the risk any less with things like QQQQ and SPY ?

In Keeping with asking stupid questions here, rather than them Lovely Smiling, Friendly Chaps at the Brokers. What are all the Q's and Undercover agents all about?

Gary

 

[Salty Gibbon]

QQQQ is the Nasdaq-100 Trust 1 QQQQ Price: $38.44 -0.14 -0.36% Vol: 62,260,600 2:53 PM ET 1/13/2005

The Fund seeks to provide investment results that generally correspond to the price and yield performance of the component securities of the Nasdaq-100 Index.


SPY is the SPDR Trust;1 SPY Price: $118.51 -0.06 -0.05% Vol: 31,792,400 2:49 PM ET 1/13/2005

The Trust seeks invest results that, before expenses, generally correspond to the price and yield performance of the component common stocks of the S&P 500 Index.

 

[Salty Gibbon]

I'm not trying to be deep, but everyone's risk profile and comfort level is different. I never have more than 10% in the market at any one time and my risk per trade is normally WAY less than 1% which is my absolute MAX.

Unless I have misunderstood you Tony you must either trade exceedingly small size or else you have an enormous trading pot of dosh.

 

[Gardan]

QQQQ is the Nasdaq-100 Trust 1 QQQQ Price: $38.44 -0.14 -0.36% Vol: 62,260,600 2:53 PM ET 1/13/2005

The Fund seeks to provide investment results that generally correspond to the price and yield performance of the component securities of the Nasdaq-100 Index.


SPY is the SPDR Trust;1 SPY Price: $118.51 -0.06 -0.05% Vol: 31,792,400 2:49 PM ET 1/13/2005

The Trust seeks invest results that, before expenses, generally correspond to the price and yield performance of the component common stocks of the S&P 500 Index.

Thanks Salty thought YOU where going mad there for a moment....Phew!

 

[Salty Gibbon]

I can't go mad.

I am already there.

 

[Gardan]

Re TheBrewsters

Unless I have misunderstood you Tony you must either trade exceedingly small size or else you have an enormous trading pot of dosh.

Salty, I heard on the grape vine that Bramble is well Brewstered.

Them sweet dogs are just a facade to make us think he's a nice country boy. Well it doesn't wash, get the bar Bramble.

 

[TheBramble]

Unless I have misunderstood you Tony you must either trade exceedingly small size or else you have an enormous trading pot of dosh.

I don't think you misunderstood me Salty. I wont get washed out of the market unless 10 consecutive 9/11s happen and I'm fully into the market on each one.

Let's take a hypothetical example.

Say you have a trading pot of $1M.

I have a max risk of 1% risk per trade and 10% exposure at any one time over all open positions.

Risk is my stop+costs+slippage.

Exposure is what would happen 9/11 - but expectation of being absolutely totalled on the trade rather than just suffering a severe mauling.

Say I've got a nice long setup on a $25 stock with an estimated Risk of 20c (which is pretty typical).

In theory I could trade 50,000 shares (1% of $1M = $10K) / 0.20 (risk) = 50,000 shares. (yep, get that filled in one go - I'll watch )

My exposure would be 50,000 X $25 = $1.25M....oops...I only want to take out 10% of my pot so I downsize. My total exposure on this trade (assuming I want to got full throttle on this one and not have any juice left for other positions) is $100,000 = 4000 shares.

You'd think it would be a lot easier to just go straight to the (total cap X 10%) / stock-price to calculate my position size, but I still always work from my risk side first. Primarily because (a) I don't like anything more than 35c risk and (b) I need to measure my Risk against my target Reward.

Also, if LII is showing bad depth or 'lumpy' strata or the bid/offer spread is wider than it 'should' be...I'll pass.

So yeah, very Risk averse and unlikely to ever be out of the market (again), but at any point in time, I'm sure, my brother and sister traders will be making tons more than me. But they wont be the same brother and sister traders a couple of years down the line...

 

[TheBramble]

Them sweet dogs are just a facade to make us think he's a nice country boy. Well it doesn't wash, get the bar Bramble.

GradeEarth, get back on topic or I'll mention Rooney again...

 

[Gardan]

Tony

I don't think you misunderstood me Salty. I wont get washed out of the market unless 10 consecutive 9/11s happen and I'm fully into the market on each one.

Let's take a hypothetical example.

Say you have a trading pot of $1M.

I have a max risk of 1% risk per trade and 10% exposure at any one time over all open positions.

Risk is my stop+costs+slippage.

Exposure is what would happen 9/11 - but expectation of being absolutely totalled on the trade rather than just suffering a severe mauling.

Say I've got a nice long setup on a $25 stock with an estimated Risk of 20c (which is pretty typical).

In theory I could trade 50,000 shares (1% of $1M = $10K) / 0.20 (risk) = 50,000 shares. (yep, get that filled in one go - I'll watch )

My exposure would be 50,000 X $25 = $1.25M....oops...I only want to take out 10% of my pot so I downsize. My total exposure on this trade (assuming I want to got full throttle on this one and not have any juice left for other positions) is $100,000 = 4000 shares.

You'd think it would be a lot easier to just go straight to the (total cap X 10%) / stock-price to calculate my position size, but I still always work from my risk side first. Primarily because (a) I don't like anything more than 35c risk and (b) I need to measure my Risk against my target Reward.

Also, if LII is showing bad depth or 'lumpy' strata or the bid/offer spread is wider than it 'should' be...I'll pass.

So yeah, very Risk averse and unlikely to ever be out of the market (again), but at any point in time, I'm sure, my brother and sister traders will be making tons more than me. But they wont be the same brother and sister traders a couple of years down the line...

So why not just put $900k in the bank and gung ho it (so to speak) with the $100k ,risk is the same is it not? And Risk then may be calculated using Stop calc.

Also what if I had 1/2 of my open positions on Buy and half my open positions on sells, would you factor this in to your risk. Or should I also consider that if I had say 5 or 6 open positions (which is well beyond my capabilities but I live in hope) that 5 or six Black Swans may come down simultaneously and land on all my positions.

If one of the Swans lands on my Sell trades would I be quids in?


$60 1000 $60,000 30% Buy
$40 1000 $40,000 20% Buy
$40 1000 $40,000 20% Sell
$30 1000 $30,000 15% Sell
$30 1000 $30,000 15% Sell

$200,000 £100k approx


* £/$ conversion at 1/2 for illustration only

sorry converted the chart on £100k sterling,its late, but you get my drift I hope.

Or Have I lost the Plot???????

Gary

 

[Salty Gibbon]

Totally understand Tony.

So if you had a US$ 50,000 pot and you decided to trade Google, you would only trade 25 shares based on your rules.

 

[Salty Gibbon]

Paul ( Trader 333 ), bearing in mind your previous comments about never allowing your total market exposure to exceed your account balance, do you think that Bramble is overly cautious / super-prudent ?

What it means basically is that under those kind of rules you would need an account balance of US$ 200,000 just to trade 100 shares of Google.

 

[Tuffty]

For reference big one day moves (from J Siegel; Stocks for the Long Run 2002) based on Dow Jones for 116 years from 1885 to 2002. A move in one day over 5% occurred 126 times, (63% of them in 1929-33), 46.8% of them were up, 53.2% down. Around 33% of them were associated with news items. The distribution by % move was as follows:

Move of over 20% (22.6%) 1
Between 15% and 20% 0
Between 10% and 15% 6
Between 7.5% and 10% 16
From 5% to 7.5% 103

The daily maximum loss may be extended due to the market closing for an extended period because of physical or political reasons. Examples are break out of WW1, 1930’s bank holiday closing, and the World Trade Centre 9/11 incident.

Also don’t forget that some stock markets have disappeared altogether due to revolution and war. I'm not sure if any have been lost or trading disrupted due to natural disasters.

 

[Salty Gibbon]

You wouldn't worry too much about a stock suspension and re-entry into the market at a much lower level if you were short.

Do stocks ever come back from suspension at a higher price or do suspensions mainly occur as a result of bad news and cause downward price movements ?

 

[Trader333]

Salty,

It is total "Account Exposure" that I am concerned with so that if a stock dropped to 0 then I am still able to walk away owing nothing. Personally I dont risk more than 0.4 of 1% of my account on any trade.

When suspended I have only heard of shares opening up lower, maybe someone else can say whether there have been any cases the opposite way round.

Garden,

You are correct in that if you are Short you would make a killing in these circumstances.


Paul

 

[Mr. Charts]

Hi Salty,
There are very frequent cases of suspension and the stock coming back higher. However, they tend to be just prior to an announcement and usually after market close. This messes up the people who trade post market or hold positions after normal close.
My normal maximum loss scenario is well under 1% on each individual trade, but I am sometimes in four simultaneous trades so might have a total exposure of 2% - 3%.
I am not ruled by a bean counting attitude with odd numbers of shares, but trade in round number tranches.
When a trade goes against me I rarely wait for my maximum stop to be hit but exit for a minimum loss at worst and usually scratch or a small profit on the failed trades. This means in effect my actual risk on a trade-to-trade, day-to-day basis is much less than the maximum risk. In other words, the effect of my active position management of open trades mimimises risk further than simple calculation.
Catastrophe event planning, e.g. terrorist attack, needs to be considered and there are easy "insurance" choices such as long deep OTM puts.
For single stock catastrophe events, exposure should be limited to what one can "afford" to lose and should never exceed margin already deposited. Margin deposited should never be the total of liquid funds available.
Over exposure = gambling = inevitable failure.
To be successful in the markets and generate enough consistent profits to make the whole enterprise worthwhile, you MUST comfortably embrace a degree of risk, but that must be acceptable.
The concept that you should trade say, 451 shares of a $22 stock or 296 shares of a $33.52 stock because you think your maximum calculated exposure size should be $9922 is not the approach of a careful risk averse trader, (as I am).
It is the sign of a bean counter mentality which will lead to profits barely amounting to a string of beans.
Richard