I have read books where they recommend to not have more than 2% risk. I take that to mean 2% loss to a trading account per trade. My 2 systems do not use a stop loss and are back tested over 20 years. I have not got good results with a trailing stop, etc. They are long term trend systems. Looking for your thoughts. Here is my example setup for you to review. I have a fictitious $10,000 trading account. 1 system trades 8 assets. The other non correlated system has 5 assets. 1st I tested on 1st system and divided 10k by 8 to give me 12.5% to trade rounded to 12%. Did the same for the other system so $10k divided by 5 = 20, % to trade was 19.5%. Both systems had a good APR and other metrics over over 20 years. So now thinking I will take $10k / 13 assets = 7.69 rounded to 7% per trade. Looks like the only way to get down to a 2% risk is to add more assets to limit my risk. Or trade less % of equity. I do have other accounts that I do not actively trade. I do understand that it is unlikely that any of these assets ever lose 100% because these are broad based assets usually based on an index. thank you, Larry
I wouldn’t divide evenly across instruments because some are more volatility than other. One of the key is to normalize risk across positions. You can’t have one trade dominate your portfolio otherwise you ain’t diversified. Why wouldn’t you trade more markets ? Most managed futures trade 10 to 20. By the way … if you trade 2 positions … Your risk on each is 50% but I hope you won’t let the price goes to zero. Guess you can set a 50% stop loss so you risk only 25% (0.5*0.5). I’d use volatility measure such as ADR and multiples to determine a stop loss and position sizing.
If you are not using a stop loss then you are more investing than trading. So just ignore the 2% risk that books on trading tend recommend.
More important is the overall leverage you are going to use. Make sure you do not overleverage, then you are fine.
All traders and investors should strive to limit capital exposure. "I am more concerned about the return of my money than the return on my money." (Mark Twain) Short term lower the percentage, and vice versa higher longer term.
I think Im following you... 100k account,risking 10 percent.. 2 percent risk per trade,assumes a hard stop set in place. Position size is based on 2k risk/some vol measure,i.e 2xATR.. Theoretically,you could have 5 plus positions depending on vol level. you may be leveraged as well That's the basics
Another option is trading options (pun intended! ): With options, especially options spreads, you can exactly limit your risk by varying some parameters like strike and DTE. Ie. 2% risk per position (trade) is doable. I'll try to append an example to this posting... And: by this method you don't need to add more assets. Here's such an example (not the best one, but just for demonstration): https://optioncreator.com/stso1vv It's a bullish trade. Using a CashAcct one can lose max 1.88%, and win max 2.21%. Using a MarginAcct the result can be about twice better (my program handles only CashAcct).
If the investment in one trade could indeed result in losing all money then the invested amount should be 2% or less. However, if your analysis of this trade indicates that it could lose half its value, then you could invest 4% of your capital in this trade. In general terms: you have to analyze the risk of each trade and ensure that your invested capital in each trade is such that the risk remains below your 2% limit. As a rule of thumb the risk of each trade can be estimated to be three sigma of the volatility of the price of that instrument.
Can you please give an example? How do you compute this? Do you take 4 sigma minus 3 sigma on both sides and sum the absolutes, or how else? If yes, then why 4 sigma, why not more? For example for this case: MeanSpot=100 AnnualVolatility=30%, one gets for 1 year: for +3SD a Spot of 245.96, and for -3SD a Spot of 40.66
I was not thinking of instruments with such a large volatility. The topic starter mentions that he trades in ETFs which track an equity index ( e.g. SPY or something like that). Those have a volatility of 10% ~ 15% (estimated). So, if you then use a rule of thumb of 3 sigma, you get a potential maximum loss of 30% ~ 45% of your invested amount. Now you can calculate how much your maximum investment in this instrument can be if you don't want to lose more than 2% of your account value.