Challenging the 1% rule

Trading Discussion
1

A recurring theme I seem to see on this (and many other) forex forums is that one should only be risking 1% of their account per trade. I’ve even seen some go so far as to say that anyone who risks more than this is foolish/reckless/gambling etc. I am here to state the opinion that this is complete nonsense.

Now don’t get me wrong. For the average person starting out, it’s a good rule. But making a blanket assertion about those who don’t follow it is ridiculous. Personally, I believe that risk tolerance – and the effects of drawdown – are different for everyone.

Tolerance. Let’s think about that word.

When a lot of people use the word tolerance, they’re speaking of the level at which they can drink alcohol and not be drunk. So let’s use that analogy. Does everyone have the same level of alcohol tolerance? No. Some people can do one shot of tequila and be completely wasted. Some can do 5 and still walk in a straight line and say their ABCs backwards.

One needs to be aware of how their brain reacts, and that not everyone’s brain reacts in the same manner. I come from a background of playing tournament poker – where the process may differ from trading, but the psychological and emotional reactions to gain and loss are identical. One thing that happens in the career of a pro tournament player is significant drawdown.

40%. 50%. 60% drawdown are all realistic no matter how good of a player you are. Such is the nature of that particular endeavor. In 2010, I won a tournament that had a field of over 1,000 players and made roughly 800% of my account in one day.

Over the month following, I lost around 25 tournaments in a row.

My point in all of this is not to try and draw comparisons between poker and trading, as that has been done to death. My point is to say that, through our individual experiences, we develop different emotional responses. For me, a 10% drawdown on a risk-based account is hardly a blip on my radar. For others, it’s enough to put them on “tilt” (as we say in poker) and cause them to chase trade set-ups that simply aren’t there in an effort to recoup their losses.

In summation… Before you suggest that everyone should follow the 1% rule, or else they are reckless, consider the fact that all traders are different.

Thoughts?

2

The 1% or 2% rule is usually regurgitated by salesmen attempting to sell you their course. They want you to survive as long as possible and end up in positive standard deviation, which will certainly occur when risking small chunks like that. The gullible trader will then attribute that to skill, when in reality it’s just variance and they still have a negative expectation.

I think it’s a good idea for newbies to follow the 1% rule until they’ve achieved consistency and profitability. From there, you can determine the optimum risk percentage using the Kelly Criterion.

3

Had never heard of Kelly Criterion. Thanks for the mention… Based on what I’ve done demo trading the Kelly formula is telling me 10%. Although granted that’s on a relatively small sample size of demo trades, so not much should be gleaned from that.

4

You’ll be hard-pressed to find someone who disagrees with you here.
The bottom line is that newer folks just have no business over-leveraging themselves.
Risk management is clearly going to vary from trader to trader, and system to system.
The “1% rule” is just a good principle for beginners to adhere to while they learn the ropes.

Some folks are okay with 25-30% drawdown, others aren’t.
No one is claiming that all trading principles apply to all traders across the board.
That’s what makes the trading world go 'round…I think the EURO is going to go up, you think it is going to go down and in-between those opinions we have a market.

5

Glad to hear a like-minded opinion. All I seem to see either here or in articles reads otherwise. But I understand from a new trader standpoint.

6

You know what you are right as there are no rights or wrongs in trading :smiley: There are just wins or loses :smiley:
Anyway to quote W.D. Gann: (I believe that he would agree with you :P)

Amount of capital to use: Divide your capital into 10 equal parts and never risk more than one-tenth of your capital on any one trade.

And btw. [B]All’s fair in love and war.[/B] :smiley:

7

I use a method called optimal F for position size however I have a well-established trading methodology with a win percentage Of 91% I think using the optimal F formula works really well However you must have a well-established trading methodology which aspiring traders will not have. Since the forums are usually packed With aspiring traders and those without well-established plans. I usually just refer to the 1% rule for position sizing. And the truth of the matter is 1% risk is perfectly acceptable and will grow your account at a decent rate if you have a trade plan with a positive expectancy. Unless you want perfection most traders will find the 1% tolerable since most of the trades will be losses. This should give them time to learn whether method is working or not before losing too much money. I would prefer to see and recommend that the new trader risk no more than 1/2%.

8

i think it depend on trader. i trade with liteforex. i have real account. i set my SL about 5-7% account. sometime i set SL 10%. i comfortable with it.

9

You won’t go wrong following the previous advice. You need to do a lot of self analysis when it comes to risk. Catch all is what kind of trader you are and what are you trying to achieve. What kind of trader you are depends on your personal experiences, your current situation regarding money to invest, support, forex knowledge and personality’ What you are trying to achieve. Protecting capital while growing capital. Growing capital while preserving current capital.

Whatever you are trying to achieve (goals), be it full time trader, investor here’s my 2 rules

  1. How you start is not how you have to finish. Learn to crawl then walk, then run then race.
  2. Be consistent. At the end of the day, you need a trading method that long term will be more positive than negative, using a money management plan that will keep you trading no matter what and after you make your plan, work your plan being patient and disciplined.

In trading their are some things that are mostly black and white. But most to do with trading is Grey.
Again you got same great advice. Take time to digest then apply
Gp

10

[QUOTE= I would prefer to see and recommend that the new trader risk no more than 1/2%.[/QUOTE]

Now it comes to money managment for active traders, so I recommend only use 0.1-0,2 % of the capital in each trade.!!

There are several reasons for this conservative mindset …

Normally I take 10 to 20 trade every trading day.

The goal is to earn between 0.5 -1% per day …
This means that under optimal conditions i can double my account 5-12 times annually ,as is a utopia.!
The advantage is when you are “losing head mode” you get many warnings that you are not in sync with the market, take a good break, the loss is minimal …

You are more active in the trading , scaling in and out …
You will not be put out if you miss 2-3 times in a counter trade.
And when you hits you is adding position is a must.

To give an idea of ​​the strongest power “compound interest”

0.3% profit 250 tradings days = double account
0.5% profit 250 trading days = 3.47 times
1% profit 250 trading days = 12 times
2% profit = 141 times
3% profit = 1619 times
5% 198300 times

So why not try to take some profit each day, losses are moderate

11

I still don’t understand why people make posts like this…
How many traders do you know personally, that were / are able to “double their account” even 1x or 2x / year? If it were the majority, then we’d be hearing about it all over every single forex forum out there…

Coming into the trading game even [I]thinking[/I] you can double your account 12x / year, is dangerous and incredibly foolish. Why even put this idea out there?

Anything is possible, but we don’t talk possibilities. We talk probabilities. I’ve yet to meet / interact with an independent trader who has ever pulled down these types of returns.

The whole “1% / day ROI” concept is malarkey. It’s good to have goals, but, they need to be reasonable and logical.

So, what happens if the market is just chopping all over the place.
Hypothetically speaking, let’s say it’s Tuesday night, and you haven’t gotten a signal because of anticipation of a high-risk event later this week. Your “1% profit 250 trading days” strategy is now busted. You’ve missed out on 2% profits to start the week. Does this mean that you need to recoup this profit? So, on Wednesday if you get a solid signal, you’re going to over-leverage yourself so you can earn the 1% needed for the day + recoup the additional 2% missed from MON/TUE being “no-trade” days?

See what I’m getting at.
…Wins/losses are going to be randomly distributed. So, what if that trade you place on WED (in which you over-leveraged yourself) turns out to be a loser. Instead of taking a normal loss / amount of risk, you’ve now tripled your exposure. This starts the snowball effect of revenge. Which is always lost. Always.

I disagree with this.
Realize your audience here…most are newer folks who are barely experienced.
Having a “goal” like this is setting yourself up for long-term failure- plain and simple.

Your “goal” shouldn’t focus on the money you need to earn, it should focus on two primary concepts:

  1. Trading to trade well
  2. Protecting your capital

Setting a fixed % that you need to earn each day, each week, etc can violate the most basic principles necessary to longevity and long-term success. There’s nothing wrong with setting goals, but you need to be realistic about them based on your strategy and experience. Rather, if your focus is on executing according to a solid trading plan and exercising proper risk management, the money will come.

I care less about how much money I make daily, weekly, monthly and care more about:

  1. Did I properly execute according to my strategy? (Trading well, absent of fear and greed)
  2. Did I leverage myself responsibly? (Protecting my capital via logical stops / reasonable limits)
12

Forex unlimited

If you take a look at the post you will find the word “utopia” (see picture)

utopia.jpg700×334 35 KB

It means:
unrealistic idea, one impractical idea …

And that was part of my point of view where it is utopian to expect the returns that my stats show if you manage to x% every day …

Main message is to trade with smaller portion of your capital go down to 0,1 to 0.2 % instead of 1% which is the most recommended.

Be more also more active in the trading … There you adding when you are in a good trading position .


Quote Originally Posted by torulf39 View Post
The goal to earn between .5% - 1% day

Above comment was an unfortunate formulation of me. I rephrase the formulation.

I will be very happy when the market generously gives me more than 0.5% profit during a trading day …

Regarding your trading style forexunlimited

In my world it is utopia to put a buy order in a area , which your subjectively believe that the price will reverse. In my world, I must observe to see how prices have behaved during the way to that interesting area, the reactions that occur around the aforementioned areas of interest before I can take my decisions.

The world changes when you increase your bet, try to go up to 2-4 SL

As mentioned earlier, I compare your with this guru Trade Results | Forex Trading Room - Learn From and Chat With Real Traders | BK Forex

He is better at explaining market mechanisms make wonderful analysis

But but but

13

What a lovely thread, things in here that I’ve thought about a lot recently now that I am on the verge of starting out live(with a micro account).

I think the risk% has a lot to do with the so called “risk of ruin” tables that are used in casinoes. When you have some statistical data on how your method has done in back testing, you have an estimation on what your winning percentage could be in the future… this has to be taken into account when determining how much you can risk per trade. So with a lower winning percentage you would obviously want to risk less of your account. The odds of getting multiple losses in a row are high, but this could still be profitable because when that one big winner comes, like the song says, “pays for 'em all”.

But on the other hand, I wouldn’t want to risk much more on a high win rate system either, since the odds of multiple losses are still in there altho they are much less likely. The market is pretty random after all and it’s always right.

14

I use this rule.

Trade a size that allows you to sleep at night.

If the amount of the trade as it goes against you makes you nervous, you traded too much.

15

Definitely the best rule.

16

I agree, the best rule.

17

+1. Even risk tolerance is different between each trader as their account is funded with different amounts of their own overall money. Forex accounts should only be funded with speculative equity, if your life will change if you blow your account your doing it wrong. I risk 3% and go for 1% gain on each trade. I’ll win 7-10 trades and then hit a loss. That’s on average of course. If I hit three losers in a row, luckily 2 losses in a row is my worst drawdown so far, I’d be down 10%. Does that bother or scare me? Nope. My general goal is to maintain risk so that it only gives a drawdown that doesn’t change my lot size for future trades. If I was risking 20-25% per trade and hit two consecutive losers I’d really have to re-evaluate my strategy and lot size going into the next trade.

19

Braden1, if you allow me. You’re the manager of your account, but risking 3% to gain 1% goes against the principle of going to 1:1 or 1:1/2 risk vs reward, you said “luckily 2 losses in a row is my worst drawdown so far”. What if the luck disappears and you lose 10 trades or more in a row, I’d be scared at least with 30% drawndown, I’ve been there and it’s not fun. Professional traders don’t work with luck. But as I said, you’re the manager of your account and if the strategy is working for you, go ahead and keep tackling this market. Happy pips!!!

20

Interesting topic. I have been thinking about this recently too.
What if you risk 1% to gain 1% and then compound by 1% going into your next trade.
If you are very confident with your trades, I believe you can increase the size of your account significantly at the end of the week or month depending on the number of trades you take.

Of course the biggest drawdown would be when you are hit with a loss after you have been compounding your trade size after several winning trades.

21

How much you risk surely depends on the risk/reward of your strategy. If your RR is 1:10 then yes, risk only 1% per trade. But if it is 1:1 then I would look to risk 2.5% to 5% per trade.