Yes. So if you were going to open 3 trades you would have them at say .333% or something… Or, open one at 2% - groom the stop to a profitable level, open another at 2% - groom the stop…
Right?
I don’t open them at the same time, but if I did, yes I would split the risk.
Far prefer the [B]BANG. reload. BANG.[/B] style
Ha love that scene! How long do you hold trades usually? My setups will end up putting me in positions for weeks or months.
I like to get out at the end of the day, or even the end of the session, if possible.
Sometimes a setup overlaps a few days and i’ll hold parts of my position for that.
Do you have to monitor your position intraday? Or do you just set up the orders and let the dealer do the rest win or lose?
From my experience, if you are not doing automated trading then it is important to monitor you trades intraday. However if you are doing automated trading, then I do not think this is important because you trades are executed based on your set trading rules. Nonetheless, it is always good to check because situations change and you may need to alter your rules.
There is some good discussion here, but I will add some, as there is a fairly straightforward method to determine position size as it relates to risk management (not profit maximization).
The risk that is most important to manage is the risk that your account will be drawn down to a level that will compel you to quit trading. This level varies significantly from one person to the next. Unfortunately, most people learn it through bitter experience.
Traders should also have a level of profit defined after which they permanently take some of those profits off the table. You want to choose a position size that has a much higher probability of reaching that profit target vs reaching the drawdown limit. The lower the position size, the more favorable will be your odds of reaching the profit target vs reaching the drawdown limit. However, the lower the position size, the more trades will be required to reach that profit level.
Fortunately, there are online calculators that let you play around with the variables that help you find the best answer for your circumstances:
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Chris Capre’s Risk of Ruin Calculator is simple to use. However, it is based on a formula that doesn’t take into account the number of trades, and it is based only on ruin and not drawdown.
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The Au.Tra.Sy blog has a calculator that factors in drawdown limits, and is based on a Monte Carlo simulation that considers the number of trades (periods). However, it does not consider profit targets.
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Forex Scam Alerts also has an online calculator that is also based on Monte Carlo simulation that considers the number of trades and the drawdown tolerance. It additionally considers the probability of reaching the profit target (“retirement target”). The downside of this one is that it pulls the data from a big database, so you can only enter predetermined values.
The last two tools also give some discussion of risk management. There are also other online tools on the internet, but they tend to be targeted to blackjack players so are not as applicable to traders.
I have been thinking about this even more, and I am thinking about how to get into the geometry of returns or losses. Take the following example:
Coin toss.
Heads you win 6 to 5 odds, tails you lose.
If you bet $1 you win $1.20 or lose $1.00.
This looks like a sure winner at any percent risk that will keep you from going bust right? WRONG. If you risk 1% you will make money. Risk 2% you will make more. Go all the way to 8% and you will make even more. But go to 9% and you will make less than 8%. Go to 16% and you will make less than 1%. Go above 16% and a system with a positive expectancy will LOSE money.
Suppose you flip the coin 20 times. The first flip is heads, the second is tails, and each subesquent flip is heads then tails then heads then tails and so on. At the end, 50% of the flips were heads and 50% were tails. Through good or bad luck, you may do better or worse than this in 20 flips, but the more we flip the closer our outcome will get to that percentage outcome per 20 flips.
This chart shows the percent gain given a certain percent risked:
The percent risked question is not one of simply whether or not a maximum drawdown will make one go bust. But it is also a question of whether or not the percentage will turn a winning system into a losing system.
A lot to think about for a mere mortal…
-Adrian
I like what you are doing here, Adrian. Did you build this chart by alternating wins and losses, or with a random number generator and Monte Carlo simulation ?
Thanks
I simply put the data in a spreadsheet and graphed it. I did’t randomize the flips. I just ran heads/tails/heads/tails. Obviously luck would get you a bit longer or even shorter, but the ultimate expectancy the more you flip comes closer to 50/50.
I think what I will need to do is define the optimal percentage risk for my implementation over a fixed period of historical data and readjust periodically. I just have to get a good handle on the data and find a proper methodology to choose the periodicity of the analysis and frequency of the readjustment. And I will want to put my percent risk to the left of optimum by some margin of safety.
I know a lot of people might say this is making too much work of it, but all indications are that this is the numero uno most important shix a trader has to think about.
Cheers
-Adrian
Glitch in the matrix.
-Adrian
This is a risk of ruin calculator. I think it should answer all questions.
Risk of Ruin and Drawdown Calculation Tool | Au.Tra.Sy blog - Automated trading System
You won’t know exactly how accurate your strategy is %-wise but this will give you an idea.
It seems our notorious “quick pipslip” got banned. He was against LCD , that’s why 
Yeah. I noticed. I talked to him about in a different forum. I think he is jaded. I actually liked his A-holish challenging questions. But I get that babypips needs to have their limits on what they want on the forums. They don’t want too many negative ions.
-Adrian
I’d like to add my two cents on this conversation. I have been working on it for weeks and weeks reading books and writing spreadsheets with different money management formula and applying it to my trades to see which ones are best.
Here are some of my conclusions and I hope bouncing them of you guys can help me reach better conclusions.
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There are two broad ways of managing risk in trading: A) Is the one most discussed, measuring the risk of the next trading and equating it to a % of your equity. B) Measuring risk based on the worst loss we’ve encountered and neglecting the risk of the next trade.
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Method A is perfect if you have a very large investment and you are looking to get a regular income from it. Example if I have 100,000, I’m perfectly happy to risk 1000 for 2000. Because 2000 is a decent amount for me. However if I’m trading 10,000, the 200 I make may not be as lucrative if you compare it to the results of method B. Method B makes you money faster that is for sure. The only problem is it could lose you money faster as well. So…
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We never stopped and asked ourselves a very simple question: Do I want money management to protect my capital or to maximize my gains? Because it is a myth that sound money management will do both.
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The problem of method B (risking based on worst loss) is that we lose more and the equity movement is wild (I’ll tell you why next). This problem will never be solved, unless humans find a way to travel into the future. Simply put method B relies on previous data (backtesting), but the problem is past performances is not indicative of the future at all. Example, if I trade a system that was 70% successful based on my backtesting…what is the probability of winning my next trade using the same system? It is still 50-50!!
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What Method B really does, and these methods are Kelly criterion and optimal f, is tell us how much of our equity will we lose if we encounter our worst loss again. In other word, a Kelly criterion of 1 would wipe out your account if you encounter your worst loss again. 0.5 would deplete half your account.
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But what if you don’t encounter your worst loss again? You would make massive, massive gains. Three consecutive winning trades could see you double your account.
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So how can we avoid the drawbacks of methods like kelly and optimal f? Well for starters, do not enter a trade that has a risk equivalent or more than the worst loss your encounter. This already increases your chances of survival dramatically. The second way is by investing only a fraction of our initial investment.
Example: So let’s say I have an optimal f value of 0.7, this means I would lose 70% of my equity if I encounter my worst loss again. Now let’s say I have 10,000 available to trade. If I put the 10,000 all together and encounter my worst trade, Id have 3000 left. But what if I start with only $1000, this gives me a chance of facing my worst ever trade 10 times before I get wiped out. On the other hand, it is very easy to take 1000 to 10000 using optimal f. Something like six consecutive winning trades would do it. So dividing my investment up gives me a prolonged chance of making gains.
Let’s say I start with $1000, and I encounter my worst and lose that 1000. I put another 1000 and I lose it again. So I deposit a third 1000 and this time my system goes on a winning streak and I turn the money to 8000. Not only have I made up for my losses, usually I’d still have made more gains than the 1% method. Now I can trade the 8000 freely since 6000 of them are from my profits. If I go on a streak I’m out of the woods, if I encounter my worst trade again, I start over.
Optimal f was Larry Williams’ secret to taking $10,000 to $1,000,000. He actually traded it to $2,500,000 but he encountered his worst loss which knocked him back to $750,000.
He said that optimal f worked so well with him, that the government had to look at his accounts for years on suspicion of fraud.
Optimal f, when it works, is unmatched.
This sounds like simply dividing risk into a budget over many trades/markets. If you can get uncorrelated, you will really reduce risk.
-Adrian
I for one don’t agree with the notion of never risking more then 2% of your account. I think one of the most under rated notions in forex trading is “[B][I][U]pip-drawdown[/U][/I][/B]”. The lower your pip-drawdown is, then it suggest you have a very accurate system. So in turn if your system is accurate in the sense of entry, then you should have no limit as to the amount of your account which you risk
Well said. I have worked backwards by looking for accurate entries, instead of focusing on the profits.
No matter how you look at things, managing risk begins with knowing how much you are prepared to lose at a time, and I believe this depends a lot on the level of your leverage.
True you can trade at more than 2% risk per trade, but if your leverage is low, then you know that you are covered, Additionally, you can also trade at higher risk rate per trade, but then limit the number of trades.