I honestly don’t understand why it is advised in so many places to risk only 1-2% of your capital when placing a trade. Speaking from the mathematical perspective it’s simply not an optimal thing to do. For example babypips school’s risk management article compares risking 2% vs 10% per trade. So it goes something like this:
A forex trader has 20k in his account. From the day one (which is highly unlikely in the real world) he starts to lose money, presumably due to bad market conditions, not because his strategy sucks. So after some time this trader experiences the total equivalent loss of a 20 trades losing streak, which draws his account down to $13350 (2% risk) or to $2430 (10% risk).
Now let’s say the market conditions changes and he finally starts to make money. And the amount he have made is a equivalent to a 30 trades wining streak. So how much does this guy have now? $24180 when risking 2% and a whooping $42400 with 10% risk! waat!?
Does that mean the more I risk the more I make or is my math broken? Even risking a ridiculous 30% per trade would not have killed it. The dude would still have $42k in his account at the end. ($20k -> 16 bucks -> 42k)
Forget about how much you might earn, the lesson is to show how quickly you can lose a large portion of your account in just a few trades. Obviously, the more you risk the more you may earn, why not go the whole hog and risk 100% per trade, just think how much you can make!
By the way, is there a reason why this is the only lesson in the entire school that you seem to have studied? I don’t know your background, have you prior experience of forex trading?
[QUOTE=“YourMother;772134”]I honestly don’t understand why it is advised in so many places to risk only 1-2% of your capital when placing a trade. Speaking from the mathematical perspective it’s simply not an optimal thing to do. For example babypips school’s risk management article compares risking 2% vs 10% per trade. So it goes something like this: A forex trader has 20k in his account. From the day one (which is highly unlikely in the real world) he starts to lose money, presumably due to bad market conditions, not because his strategy sucks. So after some time this trader experiences the total equivalent loss of a 20 trades losing streak, which draws his account down to $13350 (2% risk) or to $2430 (10% risk). Now let’s say the market conditions changes and he finally starts to make money. And the amount he have made is a equivalent to a 30 trades wining streak. So how much does this guy have now? $24180 when risking 2% and a whooping $42400 with 10% risk! waat!? Does that mean the more I risk the more I make or is my math broken? Even risking a ridiculous 30% per trade would not have killed it. The dude would still have $42k in his account at the end. ($20k -> 16 bucks -> 42k)[/QUOTE]
-The thing i read above is very depend on whats your (strategy) , is it long term or short term .
20 trades losing streak not because his strategy sucks !? Thats just sucks to let you know.
1-2-5 % a trade is (perfect )for many reasons , don’t over think it.
-Portfolio trading with day trading is entire different story.
Just a quick observation regarding your calculation. You’ve assumed that return = risk.
Shifting the focus, let’s take the math out of the equation for a moment. How much greater of a prospect is there of you quitting trading having lost nearly 90% of your account as compared to only more like 30%?
Yea I’ve used 1:1 risk reward ratio to keep calculations simple and forgot to mention it. And yep I agree with you, the 90% loss might be too much for a newbie to cope with psychologically, but for an experienced trader, shouldn’t they have like 0 emotions involved?
Why does it make any difference if I’m trading short vs long term? And what is portfolio trading? I’m talking only about forex here. Sorry I’ve spend a lot of time in front of charts, but not nearly as much reading online.
I dont know man i was probably talking to myself putting comment here , i dont want get thing complex and deep down to whats matter ,
Reading is good alot of profit -losses from different traders and their experiences
Im not even supporting my point of view and comments do what you know is good your mother
Experienced traders are the ones who understand that successful trading is all about risk-management, not profit-maximisation, Mom: the ones who don’t learn that typically get filtered out of the trading process before really becoming “experienced”.
Pro-traders wouldn’t dream of risking a drawdown bigger than about 5% of their accounts, and that would be only during an extreme, unusual bad run.
[I][U]Key concept[/U][/I]: one of the major problems with subtantial drawdowns is that if they arise, it becomes extremely difficult to judge whether the system is “just having an unusually bad run” or “has stopped working”, which predicates that one couldn’t even decide confidently, under those circumstances, whether or not to continue: exactly the type of situation the planning, design and position-size-modeling process should be designed to avoid.
Good point, I didn’t consider the possible for a strategy to stop working for real. It does make sense now. i probably will grow more conservative with time, but you know when there is only 10k to trade with, you don’t really have a choice, but to risk more to make trading worthwhile. Yea it’s the classical reason why traders fail - undercapitalization.
Trader failure due to under-capitalization relates to being forced to trade too large relative to your account (you could call that excess leverage). Given that it’s very easy in retail forex to trade small positions, that really shouldn’t be an issue from a mechanical perspective.
What that leaves is the “worthwhile” aspect you bring up. That’s either “It’s not worth my time,” or “I’m not gaining a sufficient psychological reward.” The former is always a potentially consideration for low-cap traders. That’s a rational subject. The latter case is more problematic. It’s about not being satisfied with performing well from a process perspective - meaning focusing on making good trades and achieving good returns in percent terms as opposed to dollar terms.
Sorry, Mom, yet again we disagree: I see at least two other options …
(i) Go more slowly: the overwhelming majority of aspiring traders hugely overestimate what they can achieve quickly, while equally strongly underestimating the future returns from what they could achieve gradually, if they only avoided blowing their account with excessive position-sizing;
(ii) Research, develop and use methods which involve more frequent trading, so that the returns from small position-sizes can safely be compounded more quickly.
I think actually undercapitalization is probably the [I]rarest[/I] (relatively speaking) of the “five common reasons” for aspiring trader failure. Most of the people who attribute their failure to undercapitalization, in my opinion, if they’d had greater trading capital, would actually have lost that as well.
In forex, I’d agree. Other markets it’s a bigger issue.
Most of the people who attribute their failure to undercapitalization, in my opinion, if they’d had greater trading capital, would actually have lost that as well.
Interestingly, I found that among the retail forex traders I studied in my PhD research, there was a strong negative correlation between account size and leverage use. Obviously, that doesn’t mean those folks with larger accounts aren’t making the same stupid mistakes smaller accounts make. It just means those mistakes cost them less relative to their capital.
Hey everyone going off topic but would you only still risk 1% per trade if you had £1,000,000 account, on my system I have 1:3 ratio so at moment with my £1000 live account I make about £20-£30 pre trade and only risk £10 and I know if I had £1000,000 I would be getting £20,000-£30,000 pre trade which is a lot aha but would traders really stick to this rule of risking 1% if you had an account this large ?
In 2015, a paper called “Traits of Successful Traders” was published by FXCM.
One of the traits discussed was the ability to use leverage effectively.
“Profitability declines substantially as effective leverage increases: 40% of traders using an average effective leverage of 5:1 or lower turned a profit while **only 17% using 25:1 or higher closed at a profit.”
"Given the relationship between profitability and leverage, you can see a clear link between average equity used and trader performance. At the low end, a mere 21% of traders with $1,000 equity turned a profit.
Those with more than $10,000 in equity were more than twice as likely to see profits. Those with under $1,000 in equity used an average of 28:1 leverage, while traders with more than $10,000 used an average of 5:1."
Very few traders with £1,000,000 accounts are primarily trading spot forex against counterparty market-makers.
Very few traders with £1,000,000 accounts are using position-sizing anything like as high as 1% per trade. For many reasons, there’s generally an inverse proportionality between account-size/capital-size and position-size.
Your results from a £1,000 account are nowhere near scalable to a £1,000,000 account. Slippage alone would be a huge issue.
Hmmm intriguing, so other than position size differences between the two different account sizes, what else would big differences between the two accounts? Because you mentioned about slippage could you explain more please.
It relates to the availability of what you want to buy, at the price you want to pay for it.
The more you want to buy, the more the prices increases.
When you have a £1,000 account you can fairly reliably trade anything you want, in whatever size you want, at the price showing on your screen. When you have a £1,000,000 account, you can’t.
Besides which, with an account that size, you wouldn’t be trading spot forex against a counterparty at all - you’d be using a genuine broker.
Absolutely no criticism implied at all, but I think your questions arise through lack of experience of brokers, and how the market really works.
Position-sizing (expressed as a percentage of account-size) decreases as account-size increases.
Respectfully, your question about whether someone with a huge account would “still only” be trading 1% of their account as their position-size is unrealistic: they wouldn’t be trading anything like as much!
It is a common sensible approach to risk management that has some roots in the theory of gambler’s ruin. Gambler’s ruin - Wikipedia.
Making a long story short, if you risk a lower fraction of your account per trade, you give yourself a better chance of weathering a short term losing streak that reduces your account balance. @eddieb point seems a bit extreme but highlights the point perfectly. You could be trading with and R:R 1:1 and a system with a 60% probability of winning. However if you risked 100% of your account balance and happened to lose that in the first trade (with 40% probability) then that would be the end of the game for you.
