Risk Management with a Portfolio Strategy

I’m feeling pretty confident about my trading right now and trying to decide if risking more than 2% per trade makes sense.

I trade off the daily charts and using a portfolio strategy. Currently, I have 8 open positions out of the list the 20 some pairs I watch.

Would it make sense to risk as much as 5% per trade? What things should I consider before I decide whether I risk more per trade?

I’ve had to think this through after unpleasant experiences myself. The problem as I see it is not so much that a 5% loss could not be made up, its that so many markets are correlated either directly or under market stress conditions.

Direct correlations are easier to plan for and may not be catastrophic, but market stress conditions are unpredictable. And they are inherently big. See what happened to Oil, Gold, Silver and many major forex pairs across the recent US equity markets correction.

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I guess I could just go back through my journal and see how it would go if I had risked 5% instead

It depends as well on how big your account is.

I would be comfortble risking a bigger percentage, IF my account size was small and represented say 10-20% of the money I had set aside for “Betting” - My own feeling is that it’s pointless keeping say !00,000 in an account and only risking 2% on a fairly high hitting strategy, when I could keep 90,000 under my own control elsewhere and only have !0,000 in the account.

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I’m actually suggesting that would be a wasted effort as severe pan-market shocks are uncommon and there’s no reason to think the next one will be just like the predecessors.

I’m not against the 5% rule and though I use the 2% rule I think it should not be so universal and unquestioned. But I think we need a more sophisticated approach.

I’ll have to agree. Cash in your trading account is there to work. I don’t like the idea of being so cautious to the point of not putting cash to work. If the cash is not ready to work; it probably shouldn’t be in the trading account.

The question then becomes one of your attitude to risk. 2% or 5% does not command the same emotional weight on all traders. I commit as much as 25% for a multitude of reasons. A lot of these reasons are feedbacks from my trading stats.

Mind you, I’ve just returned from a 3yr absence so take my opinion accordingly.

Commitment and risk are an interesting topic.

I usually never risk more than 2% of my account capital per trade. But I technically break my own rule when I take multiple positions on the same currency. With say 4 positions open long on AUD, I’m standing to lose 8% if the currency bombs, so I try to be disciplined - put out 4 or 5 or buy orders but then cull the weaker positions asap after they’re triggered.

On a single forex or stock index trade I have risked 5%, but that was long on the Dow during the fabulous uptrend a couple of years back. That period involved me pyramiding the original Dow long multiple times but the net capital risk remained 5%. I would never risk that much on a forex trade.

Commitment is another topic. I advise new traders to - assuming they have a reliable broker - put all available capital into a trading account. Nobody got rich by saving money.

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So true.

The PM view could be very generous to individual trades. One could slips and slide as well. It may seem like a case of bad discipline when you spend more lots on this and that but it is one’s style. I only really trade majors and not always in every pair. The idle bit of the 25% (cash) gets allocated to the pairs at work; some could have higher lot sizes.

I do perfectly understand why new traders should do it in a certain way. After all, new traders are often preoccupied with individual trades. They would need to be more creative later on.

Good stuff though.

Well done.

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I’ll have to agree. Cash in your trading account is there to work. I don’t like the idea of being so cautious to the point of not putting cash to work. If the cash is not ready to work; it probably shouldn’t be in the trading account.

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Risk management plays a very important role in trading. A 2% risk is possible for each trade but understands the market situation. 1: 2 Risk Rewards can recover the loss. Trading can be a loss but you lose the ability to cover this loss. Only risk rewards can cover this loss.