Maximum risk percentage | Psychology and Money Management


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Maximum risk percentage

  #15 (permalink)

North Carolina
 
Trading Experience: Beginner
Platform: NinjaTrader, Tradestation
Favorite Futures: es
 
Posts: 644 since Nov 2011

@silverDragon

Actually, the risk is less important then having a working method. But, yes you are absolutely correct that a daily loss limit from 2% to 7% makes sense for a day trader. One good reason for the total risk limit is to limit the damage caused by serial correlation of losers which is probably the #1 account killer. Because of day structure, serial correlation of both winner and loser is, I suspect, more likely for day trading.

There are several factors actually that are important. The probability of taking a loss and probability of correlated losses are probably the most important factors. Psychology is relevant too which is why with quantitative systems it is possible to risk more. So, if you're trading an options spread with a larger risk but a statistically low probability of taking that loss-- that's a tail risk.

The account size is relevant too. If you're trading a 10k account with a $600 daily loss limit, you are at 6% risk per day. On the other hand, a 100k account with a 3% risk limit would be 3k. Assuming a 30% return on risk objective per day, you are at $180/day on the smaller account and $900 per day on the larger amount. If you have an income objective, for example, of $500 per day there is no reason to risk 3% on the larger account as only ~$1600 should be needed.

There is also the risk of your method to quit working. So, this is why it doesn't make sense to compare trading to investing.


Silver Dragon View Post
General question: Should the amount of risk per trade factor in the type of trading you are doing? For example day trading vs swing trading.

If your a day trader and make 3 to 5 trades a day, wouldn’t you want your % risk to be lower?

If your swing trading where your making 1 trade a week, then the % risk could be higher?

Robert


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