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Dealing with risk adjusted returns

  • #1
  • First Post: Jan 7, 2013 6:27pm Jan 7, 2013 6:27pm
Assuming that said trader will not blow up the account, how do you adjust your risk to your strategy?

Lets assume someone risks 1% a trade, and gets 5% a month. If he doubles that to 2% risk, will he get 10%? Or is there more at play here?


What do you personally do when you are trading with variable risk?
  • #2
  • Jan 7, 2013 6:41pm Jan 7, 2013 6:41pm
Quoting aspiring25
Assuming that said trader will not blow up the account, how do you adjust your risk to your strategy?

Lets assume someone risks 1% a trade, and gets 5% a month. If he doubles that to 2% risk, will he get 10%? Or is there more at play here?


What do you personally do when you are trading with variable risk?
Have an edge and trade with a maximum of 2%. Why 2%? Because market doesn't always work the way you want. Using 2%, you have better chance to get out of bad drawdowns. Less is better though. 2% is optimal for most normal directional system with sl and tp.
  • #3
  • Jan 7, 2013 6:55pm Jan 7, 2013 6:55pm
Quoting aspiring25
Assuming that said trader will not blow up the account, how do you adjust your risk to your strategy?

Lets assume someone risks 1% a trade, and gets 5% a month. If he doubles that to 2% risk, will he get 10%? Or is there more at play here?


What do you personally do when you are trading with variable risk?
Can you be more concise on your question?
  • #4
  • Jan 7, 2013 7:27pm Jan 7, 2013 7:27pm
How do you justify your usage of risk in your strategy, and is a linear increase in risk = to a linear increase in gains/losses?
  • #5
  • Last Post: Jan 7, 2013 7:36pm Jan 7, 2013 7:36pm
Quoting aspiring25
How do you justify your usage of risk in your strategy, and is a linear increase in risk = to a linear increase in gains/losses?

Risk is a function of the market and probability. Linear increases in risk are not necessarily equated with gains or losses. That is why your Sharpe ratio is very important. It shows you the non-linearity of risk adjusted return of your strategy. Here is a good thread explaining it: http://www.forexfactory.com/showthread.php?t=22287
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