Isn't 2% per trade massively flawed? | Forex Factory

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Isn't 2% per trade massively flawed?

  • #1
  • First Post: Mar 30, 2015 10:56am Mar 30, 2015 10:56am
Hi all,

Just a thought:

People all over the web say only risk 2% per trade which although sounds good, surly is massively flawed, for example:

I enter long with a 20 pip SL, risking 2% of my account. There is a black swan event/caught in news event causing slippage (which do, and will happen)
I get slipped for lets say... 200 pips (nothing compared to EURCHF recently)

And now, 20% of my account is gone?
Or even worse, in EURCHF case, you are now in massive negative equity.

Wouldn't a better approach to designate a 'realistic worst outcome' say of 2000 pips, then work out how much equity you need in your account to sustain such a loss?

For example, $20000 per 1 lot traded (meaning even in a worst case scenario and you are slipped 2000 pips, you would be in a much better financial position to handle the loss) ... or at least, wouldn't enter negative?

Surely risking 2% per trade fluctuates a LOT based on SL size (10 pips away vs 300 pips away) in regards to market exposure and risk?
  • #2
  • Mar 30, 2015 11:16am Mar 30, 2015 11:16am
Quoting flinx
Hi all, Just a thought: People all over the web say only risk 2% per trade which although sounds good, surly is massively flawed, for example: I enter long with a 20 pip SL, risking 2% of my account. There is a black swan event/caught in news event causing slippage (which do, and will happen) I get slipped for lets say... 200 pips (nothing compared to EURCHF recently) And now, 20% of my account is gone? Or even worse, in EURCHF case, you are now in massive negative equity. Wouldn't a better approach to designate a 'realistic worst outcome'...
People who talk about risking 2% are just demo or unsucessful traders. You can't risk 2% of your K dedicated to trading, it's just insane.
  • #3
  • Mar 30, 2015 11:31am Mar 30, 2015 11:31am
I've found that worrying about that "black swan" event has cost me much more money than it saved me by keeping me out of good positions because of the fear of slippage. Slippage is part of the business and is not something that can really be planned for in advance. You could cut your position size down in anticipation of slippage but then you are just reducing your earning power on 95% of your trades over the fear of 5% (I assumed 1 out of 20 trades to generate a significant amount of slippage). Overall, you will probably be worse off over those 20 trades if you are already a profitable trader. If you are not a profitable trader, what the hell are you doing risking 2% anyway? You should be trading the lowest size possible and doing mostly everything in demo.

Plus, a 20 PIP stop is too tight IMO. Normal volatility will probably knock you out of 50-60% of your trades (at a loss) before there is any real movement. If you are trading around news events (most likely period of slippage) with a 20 PIP stop you should just flush your money down the toilet instead.
  • #4
  • Mar 30, 2015 12:01pm Mar 30, 2015 12:01pm
Quoting turtleup
Overall, you will probably be worse off over those 20 trades if you are already a profitable trader.
I understand the point you are trying to make but the problem I see is this:
Accepting slippage as part of trading - fair enough.
Risking on every trade not only losing your account but potentially hundreds of thousands of negative equity - Sounds like playing with fire?
  • #5
  • Mar 30, 2015 12:07pm Mar 30, 2015 12:07pm
Quoting flinx
{quote} I understand the point you are trying to make but the problem I see is this: Accepting slippage as part of trading - fair enough. Risking on every trade not only losing your account but potentially hundreds of thousands of negative equity - Sounds like playing with fire?
LOL. I totally agree that spot FX trading is playing with fire. The only way to completely eliminate the risk of the SNB like black swan events is to not trade spot FX. I would recommend Currency futures options where you can actually completely quantify your risk and eliminate the chance 100%.
  • #6
  • Mar 30, 2015 12:14pm Mar 30, 2015 12:14pm
Everyone is playing with fire when we trade forex. There is no way to completely avoid that. Your br0ker can go bust in the middle of the night, or your trade can suffer any number of possible black swan events.

Worrying about those outlier events would cause too much caution so that trades are either never taken or are taken so cautiously that one can never grow their account. And account growth is what most are here for. Finding a way to maximize gains while at least managing losses is the way to do that.

And yes, a strict 2% rule is not in your best interest. There are times to risk more and there are times to risk much less. If you are new to trading you should definitely risk much less. But if you are so fearful of your br0ker going bust that you're not willing to take the risk then you are probably in the wrong business.
  • #7
  • Mar 30, 2015 12:20pm Mar 30, 2015 12:20pm
Quote
Plus, a 20 PIP stop is too tight IMO. Normal volatility will probably knock you out of 50-60% of your trades (at a loss) before there is any real movement. If you are trading around news events (most likely period of slippage) with a 20 PIP stop you should just flush your money down the toilet instead.

Actually you're flushing your money too.

20 pip isn't too tight or too large. It depends of the chart and/or the timeframe. 5 pips is a very wide SL on a 10 seconds chart and 100 pips is a very tight SL for a monthly chart.
  • #8
  • Mar 30, 2015 12:24pm Mar 30, 2015 12:24pm
Quoting Price
But if you are so fearful of your br0ker going bust that you're not willing to take the risk then you are probably in the wrong business.
My concern is not the broker going bust, but me getting caught in a freak event causing me to lose everything I own.

Are you saying that you either risk, and accept the potential to lose everything - or you don't trade?
  • #9
  • Mar 30, 2015 12:33pm Mar 30, 2015 12:33pm
Quoting Unabletrader
{quote} Actually you're flushing your money too. 20 pip isn't too tight or too large. It depends of the chart and/or the timeframe. 5 pips is a very wide SL on a 10 seconds chart and 100 pips is a very tight SL for a monthly chart.
Thanks for the reply and you are correct. My comment was based around my belief that scalping and super short term trading is a very, very difficult endeavor and I've yet to meet a successful trader (online/retail) who trades off these short time frames. Stop amounts should ALWAYS be adjusted based on time frame, volatility, price of the underlying, etc.
  • #10
  • Mar 30, 2015 12:37pm Mar 30, 2015 12:37pm
Quoting flinx
{quote} My concern is not the broker going bust, but me getting caught in a freak event causing me to lose everything I own. Are you saying that you either risk, and accept the potential to lose everything - or you don't trade?
A trader should NEVER have all of their liquid capital in 1 account. I've learned to have reserves and I cut my account down periodically to maintain what I think is a good trading balance (40K for FX). Everything goes into reserves just in case I take a bigger than expected drawdown or have a statistical run of bad trades in a row. Then, you always have capital to replenish everything. Having it all at one account at one broker is a bad idea. That way, if you take a horrendous loss in one or your broker goes bust, you don't lose everything.
  • #11
  • Mar 30, 2015 12:42pm Mar 30, 2015 12:42pm
Risk is Risk. There will always be an opportunity for black swan events like CHF that will cause massive slippage in almost all forms of investments including stocks, especially if you short them. Ever been caught on the wrong side of a stock halt? its very similar to being on the wrong side of the CHF move. If you can't accept this then you are better off not trading ever. Also best way to avoid these types of things are to not trade around news or CB talks. All of these events are triggered by new or big things people are expecting.

also even if your orders slipped for 10x risk every single time, you could still survive 18 black swans in a row risking 20%. If Central Banks were that irresponsible with the monetary system 18 times in a row there would with out a doubt be financial reform to better stabilize the market. And in my opinion has technology gets better, HFT increases, etc the markets will only be come more stable and events like this will be less likely and in less magnitude. Even since computer trading has taken place the efficiency of the market has greatly increased.

EDIT: Also if most of your orders dont slip 10x risk(which most dont) you can survive 193 losses in a row before blowing up. so in my opinion 2% risk is not flawed at all. Only time i see using a standard % risk like 2% would be a problem would be if liquidity was a problem(people trading in Yards).

sis.
  • #12
  • Mar 30, 2015 1:00pm Mar 30, 2015 1:00pm
Quoting turtleup
{quote} A trader should NEVER have all of their liquid capital in 1 account. I've learned to have reserves and I cut my account down periodically to maintain what I think is a good trading balance (40K for FX). Everything goes into reserves just in case I take a bigger than expected drawdown or have a statistical run of bad trades in a row. Then, you always have capital to replenish everything. Having it all at one account at one broker is a bad idea. That way, if you take a horrendous loss in one or your broker goes bust, you don't lose everything....
I've heard this a lot, but I don't understand how splitting your capital up prevents losses, hope you can explain.

If you have say 40K in an account, and get caught in EURCHF type event, risking 2% of account would have put you in massive negative equity due to -2000 pips... meaning that you'd require the money from your reserves to get you out of debt/negative balance on that account?

Unless you are referring to only trading with negative balance protection brokers.
  • #13
  • Mar 30, 2015 1:05pm Mar 30, 2015 1:05pm
Quoting Sis.yphus
even if your orders slipped for 10x risk every single time, you could still survive 18 black swans in a row risking 20%. Also if most of your orders dont slip 10x risk(which most dont) you can survive 193 losses in a row before blowing up. so in my opinion 2% risk is not flawed at all. Only time i see using a standard % risk like 2% would be a problem would be if liquidity was a problem(people trading in Yards). sis.
I appreciate this point, and that does indeed account for those black swan events that are not so...extreme.
However with EURCHF, people had 2000 pip slippage, meaning well over 100% of your account is gone with 2% risk (depending on SL of course)

What I'm trying to get across is WHEN the next big moves comes, surely those risking 2% will be having the debt collectors knock at the door..and they are in big trouble.
  • #14
  • Mar 30, 2015 1:11pm Mar 30, 2015 1:11pm
Quoting flinx
{quote} I appreciate this point, and that does indeed account for those black swan events that are not so...extreme. However with EURCHF, people had 2000 pip slippage, meaning well over 100% of your account is gone with 2% risk (depending on SL of course) What I'm trying to get across is WHEN the next big moves comes, surely those risking 2% will be having the debt collectors knock at the door..and they are in big trouble.
The thing is there is always risk of Margin Call and owing more than your initial deposit. The only way to truly escape this, which appears to be the goal of this thread is to only trade Long with 1:1 Leverage, and you can't trade currencies as one currency long is another short. As long as you are short something your potential loss can be infinite no matter what leverage you use.

So the problem does not necessarily lie in the SL Size or Risk per trade. it lies in the direction of the trade as there is only one absorbing state(or hard stop) of the market, $0.00.
  • #15
  • Mar 30, 2015 1:12pm Mar 30, 2015 1:12pm
Quoting flinx
{quote}.... Are you saying that you either risk, and accept the potential to lose everything - or you don't trade?
Pretty much, yeah.

Unless you've got some way of guaranteeing that a black swan event won't occur. Of course you can always plan for a 2000 pip move that would only take a very small slice of your stake. Many traders here will recommend that you do just that. If you have a large enough account then that is probably what you should do. If not then you're trading for pennies and it's not worth the time spent.

At some point each trader has to weigh the risk and compare it to the reward. Fear vs. greed..... Time spent vs. opportunity cost.

It's going to be different for each trader, so one size will never fit all. I quit trading swiss 3 years ago. I still have enough things to worry about and black swan events just isn't one of them.
  • #16
  • Mar 30, 2015 1:21pm Mar 30, 2015 1:21pm
Quoting Price
{quote} Pretty much, yeah. Unless you've got some way of guaranteeing that a black swan event won't occur. Of course you can always plan for a 2000 pip move that would only take a very small slice of your stake. Many traders here will recommend that you do just that. If you have a large enough account then that is probably what you should do. If not then you're trading for pennies and it's not worth the time spent. At some point each trader has to weigh the risk and compare it to the reward. Fear vs. greed..... Time spent vs. opportunity cost....
I see what you are saying...it just seems a phenomenal risk.. I could perhaps understand only losing say what you invest, but losing MORE is quite scary.

 

  1. I wonder if avoiding red news events would be a viable risk minimizer to prevent against black swan events like EURCHF?
  2. I also wonder if trading negative balance protection accounts is a viable option? (Oanda, FXPro) (Or maybe they would do as FXCM did and chase anyway)


could you elaborate on the Bold point?

  • #17
  • Mar 30, 2015 1:27pm Mar 30, 2015 1:27pm
Quoting flinx
{quote}I wonder if avoiding red news events would be a viable risk minimizer to prevent against black swan events like EURCHF?

As I said, to avoid swans/stock halts, don't trade around news releases. All stock halts are because of News that is sketchy and it they are very easy to predict, just like most Currency Swans are when Monetary Policy change is announced during its scheduled news release.

AVOID THE SWAN:HOW TO GUIDE
Attached Image (click to enlarge)
Click to Enlarge Name: Screen Shot 2015-03-30 at 12.23.05 PM.png Size: 59 KB


STEP 1: Close All Trades BEFORE news comes out.
STEP 2: Don't Open Any Trades BEFORE news comes out.
Your Done!

I was not affected by CHF as I do not trade if there is big red news expected within 4-24 Hours(Depending on trading strategy) of placing my trade and I always close any open trades 10-30 Minutes Before releases come off

Trading Red News is trying to trade the most unpredictable part of the market. You have better odds playing craps...
  • #18
  • Mar 30, 2015 1:43pm Mar 30, 2015 1:43pm
Quoting Sis.yphus
{quote} As I said, to avoid swans/stock halts, don't trade around news releases. All stock halts are because of News that is sketchy and it they are very easy to predict, just like most Currency Swans are when Monetary Policy change is announced during its scheduled news release. AVOID THE SWAN:HOW TO GUIDE {image} STEP 1: Close All Trades BEFORE news comes out. STEP 2: Don't Open Any Trades BEFORE news comes out. Your Done! I was not affected by CHF as I do not trade if there is big red news expected within 4-24 Hours(Depending on trading strategy)...
Thank you very much for the helpful and thought out answer.

  1. Is this a viable long term solution going forwards? Avoiding Red news events (will be adding to my trading plan)
  2. Can we rely on only avoiding news events, and go for more aggressive risk per trade (the 2% risk ideology) or should we look for avoid other things too?

Hope to hear soon.

  • #19
  • Mar 30, 2015 1:54pm Mar 30, 2015 1:54pm
Quoting flinx
Hi all, Just a thought: People all over the web say only risk 2% per trade which although sounds good, surly is massively flawed, for example: I enter long with a 20 pip SL, risking 2% of my account. There is a black swan event/caught in news event causing slippage (which do, and will happen) I get slipped for lets say... 200 pips (nothing compared to EURCHF recently) And now, 20% of my account is gone? Or even worse, in EURCHF case, you are now in massive negative equity. Wouldn't a better approach to designate a 'realistic worst outcome' say of...
MM' arent always bad as retailers imagined
  • #20
  • Mar 30, 2015 2:20pm Mar 30, 2015 2:20pm
Quoting flinx
Wouldn't a better approach to designate a 'realistic worst outcome' say of 2000 pips, then work out how much equity you need in your account to sustain such a loss? For example, $20000 per 1 lot traded (meaning even in a worst case scenario and you are slipped 2000 pips, you would be in a much better financial position to handle the loss)
Use a broker with guaranteed stops or who forgives you a negative balance and than only keep in the account what you need for trading. I don't understand the fear of killing an account, you can fund a new one within minutes. Money isn't too safe with brokers anyway.

Alternatively there are other ways to get personal safety, founding a limited company or so and trading through that. But as I have mentioned in other threads before, that will change a lot for you regarding tax and withdrawals and you will need professional help.

I don't know your trading style nor your equity, but especially for short term traders like me leverage is your most powerful tool, I will definitely not cutting that down.

BTW: these swans are rare. Using a leverage of around 150 or even 200 should be a relative safe stop before balance going red.
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