Oh, lol, I multiplied your proposed S/L by pip value … need coffee.
Regarding the leverage, you’re right, of course. As long as one fixes an appropriate risk percentage and sticks to it, all is good.
The problem with high leverage is that it tempts overtrading (position size-wise, I mean), which might result in too tight a stop-loss; systems like that look nice on paper, with high R:R ratios, but tend to be short on the win-loss ratio due to getting stopped out very frequently.
I am definitely not advocating 1:10 leverages only (actually I keep on ranting about CTFT’s 1:50 rule), but personally, my risk appetite is sated with 1:100, with the possible exception of really violent moves, as displayed by XAUUSD over the past few weeks … and then only with [B]very[/B] tight stop-losses: that way, a spike in the wrong direction and very early in the trade (once the movement has carried the trade up enough, such a spike won’t matter anymore) will only cost me comparatively little, while the prospective gains are huge. Trades like that have an R:R ratio of 1:15 or more, with me, and rarely exceed an hour or an hour-and-a-half.
Risking a higher amount doesn’t make it gambling, the [B]way[/B] you trade determines whether it is gambling or not. If you check out the maths then after a string of wins AND losses you actually end up better off with 25% risk than any other level so I don’t see how you see it like that but anyway, each to his own.
I think what’s coming across from everyone here with the ‘gambling adventures’, ‘harakiri traders’ etc is that despite 25% being the optimal level to risk, assuming your win ratio is at least 50% (otherwise you probably need to go study more) that everyone is in fact human and psychologically would not want to risk that level. If we were all robots that there’d be no discussion here, but of course we’re not. Even my suggestion to lower the risk with each loss is not needed, that was merely another psychological crutch since the law of averages will say that it works best as is, just 25% every trade regardless.
to me the best way to keep up ur 2percent is …use 2% of ur capital to start for lik 1 month…den check ur total acct balance again…den use 2% of dat the nxt month…and continue wit it dat way…dat as work so perfect for me so far…keepin it simple wins it in forex.
Hey everyone, I’m new to the forum, it’s early days demo trading but loving reading the posts here and I wanted to chime in with something occurring to me here, I may be wrong so go easy on me if I’m missing something!
OK, it seems to me the initial Math doesn’t support 25% being optimal in all cases and that, actually, the order that the Win/Loses come in matters greatly.
For example, If you were to assume that that your Wins and Losses come in alternately then you’re actually going to lose Money pretty fast.
You may find the optimal risk using Kelly criterion and this would be mathematically provable as the best risk percentage given a set of constants; however, remember some of those assumed constants are actually variables.
Specifically, risk ratio and win percentage will likely change in time. Currency flows change. If they do, you could find yourself losing a lot of money rather quickly with a 25% risk.
Then again, nothing ventured, nothing gained…
“Tell me punk, do you feel lucky?”, Clint Eastwood.
Personally, I would start with small risk. If a system gained consistent profits over time, I’d increase risk, approaching optimal percentage using probability theory. If, I encountered more consecutive losses than I would expect to be statistically likely, I’d re-evaluate. But then, I am somewhat new to Forex. My background is Computer Science. I’d put most weight on what Forex veterans have to say.
This is an excellent thread. Thanks all…
Welcome to the forums Dagga! On the surface, it looks like what you say is true. However, if you look at my spreadsheet in the first page, you’ll see that even with a horror run of consecutive losses, you will come out ahead in the long-term. The order of your wins and losses does not matter.
There are a few problems with position sizing based on kelly criteria. If you plot the curvre of returns v risk % you tend to see that returns increase steadily with increasing risk, until the optimum value, but after that, they fall off very sharply. 25% might be the optimum, but 26% leads to catastrophic losses.
As someone else has pointed out, markets are statistcally non stationary, and as a consequence, the optimum percentage could be 15% over a particular period, 22% over another, and 25% currently. If you trade at 25%, and the market reverts back to 22% you are dead meat.
In practical terms, most people cant cope with the volatility of trading at these risk levels, Its quite common to experience drawdowns in excess of 90% when trading at optimal f. A 90% drawdown on a small account, and a 90% drawdown when you have serious money at stake is 2 different things.
One thing I have learned in the 10 years or so that I’ve been doing this, is that you can never underestimate just how long a losing streak might last, or how you’ll react when it happens. Coping with prolonged drawdown at 1% risk is hard enough, I cant imagine how anyone could handle the sort of volatility, whatever the maths says. If you want more money, you trade more capital, and you attract more capital by reducing volatility, not increasing it.
I guess that Daggaland calculated with 25% risk and 25% gain (which I did, too, when having tried to reproduce your numbers for the first time).
Daggaland, KingKavair calculated with a 25% risk and a 50% gain, to achieve a Risk:Reward ratio of 1:2.
Using these numbers, his original calculation is correct.
In case you are now shaking your head in incredulous wonder (or are outright laughing) at somebody expecting 50% gain on his trading account with every single trade: everybody on this forum with more than six months trading experience reacted in the same way.
It’s utterly unrealistic, of course … I think the whole topic has been brought up more as a mathematical exercise than a serious trading strategy in the first place.
If there really was a way to increase a trading account by 50% with every trade, by now General Motors, Microsoft and probably one or the other European Government (:D) would queue outside my office with loan application forms in their hands, hehe.
