Lol - they always say that it is important to have clear goals when trading, glad to see that you have yours in place!
You’d have enough margin, but only for a tiny position … see my post #19 on page 2 of this thread for that.
O.
It’s a hypothetical figure, purely for analysis.
But even in RL, I assume most traders enter a trade with some approximate win% and r:r in mind. I know I try to backtest every system I’m interested in using, and use those results as a guide for the future.
Well I want to know why people recommend 2% risk per trade. Some people have answered. My summary:
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psychological. Using a Kelly-sized position may cause people to trade sub-optimally, such as closing trades prematurely out of fear. This will make a Kelly-sized position invalid.
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flawed strategy. A trader may incorrectly calculate his true win%. This will cause him to overbet (or underbet) every trade.
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every trade is influenced by the past. The Kelly formula assumes each trade or bet is independent, like a roulette table, but this is not the case. Past events influence the future.
Now, the three points above explain why people don’t trade using Kelly-sized positions. But it doesn’t quite explain why 2% is commonly suggested as an alternative. This makes me real curious.
edit: using the Kelly formula, a risk of 2% suggests that at 1:2 risk:reward, your expected win% would be 34.66%. With 1:1, expected win% would be 51%.
Keep in mind that the recommendation is ‘[I][B]max[/B] 2% per trade[/I]’. Many traders use 1% or 0.5% only.
This low percentage of capital at risk is directly attributable to the [U]Number One Rule[/U] for Investments, a rule which applies to every kind of investment, not only to forex or stock trading: [U]Capital Preservation[/U].
Traders treating their actions in the forex market as an investment (and not gambling for fun) will always observe this rule and hence treat forex trading, whether retail or institutional, as a business. No smart businessman will ever place a large part of his eggs in one basket … not in a field of operation as unstable as the financial markets.
While personally I do not believe in strictly limiting myself to 2% all the time (when scaling into a winning trade my total exposure tops out at 5%), I consider anybody risking 10% or more on a single or on correlated currency pairs a gambler, not a trader.
And we all know what will eventually happen, if you keep on gambling.
Cheers,
O.
Was a shameless steal of a Firefly quote 
Ah - that’s a(n embarrassingly rare) gap in my sci-fi knowledge; when they cancelled it I decided that I was not sure whether it is better to have loved and lost than never to have loved at all, so did not watch it.
It’s a fun show - well worth watching. But yeah… you’ll be disappointed at the end of the first series knowing that’s it over other than the movie Serenity which isn’t up to the same level as the series.
it was a reference to his 1290 tries. Gona need a whole lot more attempts than that lol
That’s what I’d heard, frustrating number of cancellations, these days.
By the way, (almost) welcome to the ranks of the Honorary X-Men lol!
Anyway, apologies to OP for the sci-fi hijack (sci-jack?). Back to the original question: personally I can’t see myself ever risking more than 1%, as risking more than that and then picking up a few losses - which do happen - would knock my psychology too far out of kilter. We all have different risk appetite, so this is a personal thing (although personally I think risking more than 5% per trade is crazy talk if one is looking on this as a career). I much prefer lower risk, higher probability, lower R:R trades over higher risk, higher R:R but lower probability trades. So I would suggest that everyone find a level that works for them.
In my experience, many people tend to increase risk to compensate for having a smaller trading account, effectively trying to accelerate their financial progress. For me, this is a mistake: make the trading consistent, adopt an approach that can be followed, mechanically, over the long term, and the money will come. For me that is 1% risk per trade, every trade, for others it is 2% or more. We’re all right as long as it is working for us as part of a considered and consistent overall approach, imho.
ST
How can it be crazy if they are the optimal risk levels? 25% is optimal - for a computer or a robot - or an experienced professional trader for that matter. The reason 2% is always advised is because its necessary for newbies to risk that level since they more than likely will lose! That’s what newbies do after all…in whatever field they are learning about.
2% is not more risky than 5% or even 25% but by the law of averages you will be worse off as a pro, experienced trader over time. Those are the facts, but anyone who feels its “crazy” or “risky” to trade 25% even though it is in fact better, will surely lose a lot of money that way due to the obvious inherent psychological element there.
Hi vladul11, I think the main thing is to get ones strategy worked out. I am sure there are senior members saying nothing, just smiling at us but for them to make 20 p +per day is as natural as eating. To me It is not to risk my house ex, but to make my $100-$150 a day, in SA that is a good income, and I am positive I am on my way to get there. Success to you.
I’m a good trader, but I think that risking a quarter of my account on a single trade would be crazy, that’s all I was saying. Happy to disagree, just expressing my personal opinion.
To take your second point, to risk 25% on one trade as opposed to, say, 2% obviously does not make that trade any more or less likely to work out well. However over time, the risk of a drawdown doing serious damage to the account is too great for me to think it sensible over time. Others will disagree, that’s all fine. I would take issue with your ‘even though it is in fact better’ but one of the joys of trading is that there are many different ways to approach it, many of which work.
ST
:o
lol, weird statement … in fact 25% is twelve-and-a-half times as risky (or 1,250% as risky) as 2% is, for a newbie as well as for a seasoned trader.
The reason 2% are advised as a maximum is not that new traders tend to lose more than experienced ones (who, by the way, mainly trade at much less than 2% risk) but rather that it is more sound than gambling a quarter of your capital on one trade. Preservation of capital is the first duty, not huge profits.
Which ‘[I]obvious inherent psychological element[/I]’ would that be?
And: anybody not considering trading 25% of one’s capital extremely risky is in sore need of a reality check … especially when assuming 50% gain on every trade to boot.
Would you consider playing Russian Roulette with one out of five chambers loaded risky?
That’s a 20% chance of blowing your head off.
And would you consider the fact that four chambers are empty, thus giving you an 80% chance of survival, an ‘[I]obvious inherent psychological element[/I]’?
Good luck trading 25% on every trade … if you still considered it ‘[I]in fact better[/I]’ than employing sound money management in a month from now, I’d be very surprised … and you’d surely be one lucky guy, to still have a trading account which enables you to do more than buy a pizza.
O.
lol, amusing:
Compare Simon’s post (#52) and my own (#53) to get a perfect example of the difference between a well-mannered English gentleman and a blunt-spoken German, haha. 
We’re basically saying the same thing, but the posts read completely differently.
Cheers,
O.
Lol hilarious! Thank you for the compliment, but often I am guilty of ambling around an issue when actually a little bluntness would be more fit for purpose.
For the record I think that you and a number of other regular posters do amazingly well on this site, holding sometimes-complex discussions in a second language. I lived in Germany for a year as a student, teaching in a German school, I get on very well with ‘blunt-spoken Germans’ as you put it, but whether or not I would get on as well trying to discuss trading in German… well there I think you would find me less well-spoken and have me at a distinct disadvantage lol.
Ich hab’ ein großes Vorteil, alles hier auf meinem eigenen Sprache diskutieren können!
Or something like that…
ST
Hehe, thanks, Simon.
I do have an ‘unfair advantage’ though: I’ve gone to school in the US for two years (age 15-17) and have also made my MBA in the States; further, I’ve lived in an English-speaking country in Africa for more than ten years.
So I had ample opportunity to get used to the language.
I notice though that nowadays, not using English daily, I sometimes find myself trying to remember a certain English phrase, or applying German grammar to English sentences (hence I end up correcting nearly every post, after having read it again).
I’m a bit ouf of practice, I guess … lol, or maybe it’s just advanced age.
Regarding the comparison of our two posts, I didn’t refer to the fact that, naturally, your vocabulary and grammar are way superior to mine, but rather that you disagreed politely (‘but one of the joys of trading is that there are many different ways to approach it, many of which work’) wheras I employed a rather drastic metaphor (‘Russian Roulette’) to make my point.
I guess you’re just more polite than I am.
O.
I’m obviously too polite to comment lol.
Elegant yet lethal, Mr Bond.
Hi all!
Your calculations are not wrong -although I think they are not realistic because you could not use accurate position size based on your risk% in every step of your test as position size has a discrete domain- but this does not affect the whole discussion. In fact this kind of calculation is the base of this market.
The point is that, when you talk about Win% you talk about [B][I]a system in long-run[/I][/B]. The first point you mentioned is true, it is so difficult for a human to see even a single 25% loss. A loosing streak with this risk% is really tough then!
One important point about such calculations is that human emotions will affect such a system. If a trade is closed prematurely, then the risk:reward of that trade is not the same as before, so the result of using the system differs from what expected. That is why we see lots of advice on “[I][B]Sticking to Rules[/B][/I]”.
To stick to rules of a system and control emotions, for a human it’s better to always face an acceptable risk%. So a low% is suggested.
I think you should not say “People suggest a 2% risk”, because using the term “people” needs some validated statistics gathered correctly. I personally know traders who risk 10% of their account per trade. But they are professional traders who may not predict the market accurately, but they sure know how to stick to their rules.
But about the optimal risk%, to be conservative I personally prefer to think that a system in the future may be more faulty than what it has been before. So if a system has a win-ratio of 50% in the past, for optimal risk calculation I assume that this system will have a 40% win-ratio in future.
So if you have a system with known statistics, you should prepare yourself mentally to be able to stick to rules of that system.
One of the main precepts of successful trading constantly emphasised to newbie traders, is that you should trade forex only ‘with money that you can afford to lose’. If everyone was doing that, one should be able to trade whatever % of their account they liked and to continue to trade mechanically whatever their account balance. This, however, is not the same as trading ‘with money that you [I]plan[/I] to lose’, as I would imagine that no-one trades with the intention of blowing their account.
I would suggest that trading no more than 2% (or a figure close to 2%) of one’s account has been arrived at by empirical means, i.e. the collective experience of all traders over many years trading has resulted in a balance between: a) the damaging psychological element of watching your capital diminish to nothing; b) the wish to realise a positive and worthwhile return on one’s investment risk; and c) staying in the game long enough (protection of one’s capital already alluded to) for b) to be achievable. 2% is a suggested figure and I don’t believe it’s a figure that’s been plucked entirely out of thin air.
The easiest way to approach this is to try it … start with your account at $30, assume your twenty or so consecutive losses, and try to trade your way to profit risking 25% of your account. While an interesting concept, I guess it’s not going to be achievable, but there again $30 is not going to break anyone’s bank … I wish anyone luck who attempts it!