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5% risk per trade?

  • #21
  • Dec 20, 2012 12:52pm Dec 20, 2012 12:52pm
Quoting TPOTrader
The idea that 10% or less is considered an acceptable drawdown doesn't make sense to me.

I think we trying to use the standard of hedge funds and institutional traders and apply that to us retail traders. these guys have clients to answer to. Clients who probably never placed a trade in their life.

I personally think 20-30% drawdown for a retail trader is normal. If you decide to trade for others in the future, then that's a different story.

But for the most part retail traders should be able to withstand larger drawdowns and also can...
There's a reason why -- especially in forex -- the survivorship rates of traders disproportionately favors institutional traders and firms over retailers. Plus, when you hear of really big losses at the institutional level it's usually because someone broke the rules and traded beyond their allowance... yet we see retailers blow up all the time on these forums (and around the net.)

There's also a direct relation to profitability (looking at the ones that don't blow up, but still trade even if they are underwater) and leverage/risk used over time. You simply have a much higher chance of being net positive as a trader, in the long run, if you use less margin.

I also have no idea how smaller traders ever expect to grow their net worth, and make the $ returns they spend so much time daydreaming about, if they keep blowing away their capital on over leveraged trades.

Put another way (and as I've said here before,) traders are risk managers and decision makers. Their first priority is to protect/preserve capital and then decide what's working for them or what needs to be corrected. If you think "20-30% drawdowns are normal", then at what point do you start to think something's wrong? 50%? 60%? Blowout?

Worse yet, how many trades does it take to put you at a 30% drawdown? 5-6 consecutive losses? With most systems, that's not even a sign that something's wrong, and since there will always be a random distribution of winners and losers, such a streak could cripple your account before a series of winners comes along to accelerate the recovery.

And this is just the math/probability of it.. the mental side is even worse, as you're far more likely to cave to emotional pressures when you're looking at half your account balance gone, than say, just a few percent on a bad day. How much more damage will emotional/revenge trading factor into your fresh new account lows? Can you afford to make a few mistakes here before it's too late?

I know it's cliche, but the old saying: 'new traders focus on what they can make; professionals focus on what they could lose.' And it took me quite a while to really 'get it' myself, years even, but it's very true, since not only have I proved this to myself with my own trading journey, but I've yet to meet a trader who's been around for 10+ years, and independently successful at trading during that time, without this mindset.

Just saying. Take of this what you will, but one thing I'm trying to highlight here is the inability to accumulate capital thanks to deeper losses than the account can withstand, and being unable to adjust to the market since noise alone in the distribution of your winners and losers could cripple the account. Leverage and capital are just tools.. but like any tool, there's a danger to the operator if used improperly.
FXGears.com
  • #22
  • Dec 20, 2012 6:17pm Dec 20, 2012 6:17pm
Quoting Jack_Larkin
There's a reason why -- especially in forex -- the survivorship rates of traders disproportionately favors institutional traders and firms over retailers. Plus, when you hear of really big losses at the institutional level it's usually because someone broke the rules and traded beyond their allowance... yet we see retailers blow up all the time on these forums (and around the net.)

There's also a direct relation to profitability (looking at the ones that don't blow up, but still trade even if they are underwater) and leverage/risk used over time....
Everything is relative in this business. Nobody can say 5%, 10% or 30% drawdown is good or bad. But Paul Jones did say a good trader should at least produce 2-3x his worst drawdown. At the end of the day, can you produce? fear of large drawdowns in my opinion is one of the pitfall in this business too.

Just an example.

I subscribe to barclayhedge (website for cta/hedge funds, etc.)

One of the fx fund (centurion fx) managing around $19 M.

Below are some of his stats. Note that his worst drawdown is over 20%. So you can have success from high drawdown..

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NocturnalFX is no longer offering commercial services
  • #23
  • Dec 20, 2012 8:15pm Dec 20, 2012 8:15pm
i disagree with small bet is always correct.

If you trade low probability, like 55 -65 % win ratio, high frequency, like mechanical systems, then fine.

but if you trade low frequency high win ratio then size has to be increased.

If one has 70+% win ratio and signal comes 1x a month, 2% is not enough as this will on average spit 8% p/a return. If you balance is large enough that 8% covers living costs + buffer for black swans, then ok but not many have this luxury.

Alternative is to say, dump that stupid system ?!

Also, trading longertimeframe, incresing size presents no issue until number of contracts is much larger. Why shorterm trades after 10 years cant retire even if they have high win ratio ? Because they cant increase bet size.

Other advantage of swing trading is one spends 10 hours per week doing it, and the other, one can have carrer so diversifies.

additional benefits: - not worrying about the spread so one can chose stable broker and pay bit extra. Less market manipulation, less impact of news.....
  • #24
  • Dec 20, 2012 10:48pm Dec 20, 2012 10:48pm
Quoting KingKaivar
So I was running through some montecarlo simulations, using different levels of risk. Most people recommend 1-2% equity risk per trade, which is fine. But is anyone trading above these values? I checked a trading system with 2,500 theoretical trades at 5% risk, 50% win rate, 1.25-to-1 reward-to-risk, and the numbers are mind-boggling ($10,000 starting equity turned into $1b equity).

Of course, at higher risk, your drawdowns are going to be greater. At 5% risk, I saw drawdowns up to 70% or above. I'm unsure whether humans can bear such losses....
it depends on your particular system's drawdown and what you personally can cope with.

you need to test your system strenuously enough to find out what sort of risk vs drawdown figures it gives; say at 2% risk it spits out a max drawdown at any given year of 10%, and at 5% risk it spits out 30%. then from that point on u decide how much drawdown you can handle psychologically. there is no point running on 10% risk to shoot for home run return if you break down & quit after seeing a drawdown to 50%.

i have a longer term system that gives a relatively low 15% drawdown on 5% risk. % risk adjustment to the system and what you can cope with is the key, don't take a smack bang percentage risk for all.
  • #25
  • Edited Dec 21, 2012 12:25am Dec 20, 2012 11:54pm | Edited Dec 21, 2012 12:25am
Quoting TPOTrader
Everything is relative in this business. Nobody can say 5%, 10% or 30% drawdown is good or bad. But Paul Jones did say a good trader should at least produce 2-3x his worst drawdown. At the end of the day, can you produce? fear of large drawdowns in my opinion is one of the pitfall in this business too.

Just an example.

I subscribe to barclayhedge (website for cta/hedge funds, etc.)

One of the fx fund (centurion fx) managing around $19 M.

Below are some of his stats. Note that his worst drawdown is over 20%. So you can have success from...
There's a huge difference between a 20% drawdown that's formed over half a year or more (like in your example) and the one that would be caused by ~4 consecutive losses when trading 5% per trade.

Next, dig through their prospectus and find out the leverage rates (limits) they are committed to using. Hedge funds using margin usually have to outline this. I bet you it's not nearly as high as what most non-US retail brokers offer.

EDIT: I'm not saying you're entirely wrong, I'm just trying to be clear about this in context, and trying to promote a realistic approach for 'rookies' to aim for (after all, an alpha of 2+ like your example is something even the best of the best managers deeply struggle with to keep up over 30+ year long careers.. and even then critics would argue it's just survivorship bias and luck. I don't like presenting numbers like that to new traders since they'll get dollar signs in their eyes and start to forget the risks involved.)
FXGears.com
  • #26
  • Dec 21, 2012 12:49am Dec 21, 2012 12:49am
Quoting Jack_Larkin
There's a huge difference between a 20% drawdown that's formed over half a year or more (like in your example) and the one that would be caused by ~4 consecutive losses when trading 5% per trade.

Next, dig through their prospectus and find out the leverage rates (limits) they are committed to using. Hedge funds using margin usually have to outline this. I bet you it's not nearly as high as what most non-US retail brokers offer.

EDIT: I'm not saying you're entirely wrong, I'm just trying to be clear about this in context, and trying to promote...
fully understood and agree.
NocturnalFX is no longer offering commercial services
  • #27
  • Dec 25, 2012 7:16pm Dec 25, 2012 7:16pm
The way I grow my equity is this:

Initial trade risk: 3% of trading capital

If there is accumulated profit,

Next trades: 3% of initial capital plus 10% of accumulated profit.

If there is no accumulated profit,

Next trades: Just 3% of trading capital.
Fear prevent possibilities, and so does Greed
  • #28
  • Dec 28, 2012 1:21pm Dec 28, 2012 1:21pm
Larkin said everything very right. Dont go beyond 2 percent per trade. Even if you have 10 bucks, work with it, you even can open pamm account ( for example instaforex from one buck). If you will keep your drawdauwns, and risk, quickly here will be those who will invest into you. Strangely, on liteforex and instaforex I havent found a good manager, so its very hard to keep risk at 2 percent... Everybody tries to use som b rokers bugs, martingales, overlevereging... And no solid traders... Strange.
  • #29
  • Dec 28, 2012 1:36pm Dec 28, 2012 1:36pm
Scale your Risk % to the size of your account, so a sub $500 throw away ish account, 5 - 7% gets you good account growth initially, but when you get to 10K and the fear is greater you want to drop it to 2% area realistically, 100K I guess 1%.

6% risk on a $500 account = $30.
2% risk on a $10,000 account = $200

Still making nearly 7x's the profit from a $500 account so why be greedy.


Ofcourse if your not profitable, then trade as small as you can until you are profitable, which included Demo, but small and real is better.
Nothing to it, but to do it!!! Stick to the plan FOOL!!!!
  • #30
  • Dec 28, 2012 1:54pm Dec 28, 2012 1:54pm
Quoting vaidas7777
Larkin said everything very right. Dont go beyond 2 percent per trade. Even if you have 10 bucks, work with it, you even can open pamm account ( for example instaforex from one buck). If you will keep your drawdauwns, and risk, quickly here will be those who will invest into you. Strangely, on liteforex and instaforex I havent found a good manager, so its very hard to keep risk at 2 percent... Everybody tries to use som b rokers bugs, martingales, overlevereging... And no solid traders... Strange.
I can't speak for every PAMM manager at brokers like that.. but you gotta remember that they are being ranked and displayed to the public who are very uninformed investors overall (especially when it comes to trading theory and risk.) So I'd imagine that they'd stick to what gets them noticed (appearance of consistent profits) and what gets them paid (greedy uninformed investors tossing cash around at what they think are high returning managers.)

These types of PAMM managers are in it for their own profit, not the client's since they probably never know the clients by their real names nor do they disclose their own name (just internet handles and account numbers provided by the broker), so this kinda setup would allow for a high amount of 'moral hazard' (if you haven't heard of moral hazard before, look it up, it's quite the fascinating concept that the investment and business world deals with constantly.) Then combine this environment with the near non-existent barrier to entry to become a "manager" (did you say $10? LOL) and I wouldn't be surprised in the least that you have to sift through hundreds of piles of crap just to fine one half decent manager who actually cares about building a long term business and servicing their clients properly.

A lot of places around the world prevent you from running or investing in a PAMM account, like the US for instance, for these reasons.. heck, in the US, you'd likely have to be a CTA to manage client funds and the registration costs alone cut out a lot of less-serious managers from putting out their services.


Some brokers understand that reputation and quality service are gong to lead to much stronger and longer lasting client relationships than a public PAMM board: so they will still offer manager services (MAM, PAMM, etc..) but won't do the introduction services (connecting capital to managers) unless they've personally reviewed the manager's strategy/trading and feel it would be a good fit with a client's specific needs. In these cases, the capital allocations are usually not a small sum, and managers acting with moral hazard seldom make the cut (given the broker makes the most from a long lasting, profitable, and high equity relationship.)

Hope that helps. . . Personally I'm not very interested in PAMMs myself, since I'd rather trade my own capital and I distrust others trading it for me.
FXGears.com
  • #31
  • Dec 28, 2012 2:53pm Dec 28, 2012 2:53pm
Oh, I trade a lot. And in one seminar, which was conducted by best bank in my country, the presenter, who manages millions of pension funds, replied to me, what I need to take that manager position. So he said I need diploma (ok), and knowing why you put some trades (discipline). No bullshit about TA, FA, expierience. That is tragedy, not pamm... He said I can apply...
  • #32
  • Dec 29, 2012 1:51pm Dec 29, 2012 1:51pm
if you want really outstanding results you have to accept 50% drawdowns.This takes mental toughness that few can manage.

but I agree it is silly to risk aggressively on a big account .
wo-yoy! wo-yoy! wo-yoy! wo-yoi! wo-yoy-yoy-yoy!
  • #33
  • Jan 3, 2013 5:19am Jan 3, 2013 5:19am
Hey,
I have a question about risk per trade. Say I have an account with $5,000 in it, with a 50:1 leverage say I take a share of 1000, which uses a margin of ~260 which is a little over a 5% of my capital. Say I set a stop loss of 50 pips which is 1% of my capital, is this ok for risk management. Does the 1-2% rule apply to margin used or money that could possibly be lost? thanks.
  • #34
  • Jan 4, 2013 8:54am Jan 4, 2013 8:54am
The kelly criterion tells you what fraction of your bankroll to bet to maximize bankroll growth. This is somewhat aggressive for some people so they will sometimes use a fraction of the result of the KC, i.e. "fractional kelly".

The KC is
f = (bp - q) / b
where b is the payout in b:1 format, p is the chance to win, q is the chance to lose (1-p usually)
Here the payout is 1.25:1 so b = 1.25, p=q=0.5 therefore
f = (1.25*0.5 - 0.5) / 1.25
f=0.1 or 10%
If you win 50% with 1.25:1 payoff you should not risk more than 10% of your account.
  • #35
  • Jan 10, 2013 5:23am Jan 10, 2013 5:23am
Yes, physiology is problem here. From mathematical side, in the long run if system has edge bigger positions are not such a big problem.
  • #36
  • Sep 4, 2015 5:38am Sep 4, 2015 5:38am
As far as the black swan argument goes, these incidents don't necessarily create problems for short term traders whose strategies allow them to exit the market easily. When the Swiss franc crash happened, the franc did not violently gap down. Its previous close was 1.0187 to the dollar, and the open for the crash day was 1.0189. It even went up to 1.0221 on that day, so there were plenty of exit opportunities for traders if you were using a short-term timeframe. Also, if you look at Black Monday, before the big crash happened on October 19,1987, US markets had been falling since October 14. Its the "long term" traders who get caught up in these Black-Swan events, the nimble short term traders can easily get in and get out. So taking these things into consideration when you calculate % risk for a day trader is irrelevant in my opinion.
  • #37
  • Sep 6, 2015 9:10pm Sep 6, 2015 9:10pm
For a beginner i would recommend sticking with the 1-2% risk ,as per numerous tutorials on the web. it's also used in share trading (though i'm a beginner at that as well), and for very good reason (to stop one from loosing all their money too quickly).
  • #38
  • Sep 7, 2015 8:36am Sep 7, 2015 8:36am
You gotta love these ancient threads..wonder how that trader, with no sp and tp did and whether he did go live and how long his account lasted..
  • #39
  • Sep 7, 2015 12:12pm Sep 7, 2015 12:12pm
Quoting KingKaivar
So I was running through some montecarlo simulations, using different levels of risk. Most people recommend 1-2% equity risk per trade, which is fine. But is anyone trading above these values? I checked a trading system with 2,500 theoretical trades at 5% risk, 50% win rate, 1.25-to-1 reward-to-risk, and the numbers are mind-boggling ($10,000 starting equity turned into $1b equity). Of course, at higher risk, your drawdowns are going to be greater. At 5% risk, I saw drawdowns up to 70% or above. I'm unsure whether humans can bear such losses. Thoughts?...
I can't write an EA which simulates my manual trading, but I wrote a couple ones.
Different entry and different strategy to exit.
Then there is an option at EA to optimise it, based on input params, and one of mine it was the risk / trade.
With default settings it is incredible: very soon billionaire
The DD was the same: around 89-98%
Sadly or not http://www.myfxbook.com/members/fxgr...owth-bot/71611
Gain:+2644.71%
Drawdown:94.46%

But if at the EA I will set a limit to max 35% DD I will not be billionaire soon
Depends on the MM strategy, and trade strategy: the best cases are around 1-9%.
Ex: if you open a long and you risk 2% and it comes another long setup and the previous long is open: close the previous long or keep it. It you keep it neeed to be a lot more exit setup, since your position is doubled at least.

If is closed all before a new open then risk/trade can be higher in my results.

With optimiser they has found the ideal parameters to pick the top and bottoms and the recommended SL it was 5 pip -8 pip ( + spread) And there used 50:1 - 60:1 leverage....

In live trading I won't do it.
I want to buy PATIENCE
  • #40
  • Sep 7, 2015 12:38pm Sep 7, 2015 12:38pm
Quoting pemully
if you want really outstanding results you have to accept 50% drawdowns.

"It must be true: I read it at ForexFactory".

Apologies for the facetious tone: no rudeness intended but please excuse the observation that the above is honestly one of the very most frighteningly, bizzarely inaccurate statements I've ever seen made in any trading forum.

Nobody who's successfully trading for a living would ever dream, even in their worst nightmares, of accepting anything anywhere near that magnitude of drawdown among their trading methods!
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