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Concerning risk per trade sizing
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Concerning risk per trade sizing

  #11 (permalink)
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rani View Post
These percentage or fixed amount of risk are certainly better than no risk management at all. Nevertheless I do not use them. I have my risk defined by my methodology before I enter any trade. The actual percentage or fixed amount of risk may differ based on probability and RR. I am willing to risk more on higher probability trade with higher RR.
On the other side I always enter any trade with "black swan" kind of stop loss. Never otherwise.

Risking more on higher probability trades, unless your probability is 100%, when you loose on such trades, you also lose more then normal. A method that does not distribute the risk equally among trades runs the risk of accelerating the point of ruin. The failed trades at the higher risk level will generally carry too much weight in the overall performance of the method.

A lot of traders mention using probability in their trading, yet those traders are discretionary traders. If you are relying on probability to trade, then you have to take every single trade that your method signals. The moment you use your discretion to cherry pick even one trade, then the numbers you spent so much time calculating go right out the window, they become meaningless. Example, if you have a signal that is calculated at 80% win ratio GUARANTEED, and your method gives you 100 signals, and you choose to take only 20 of these signals, you may well have chosen to take the 20 losers out of the 100. You just got a 0% win ratio, out of a system that is a GUARANTEED 80% win ratio.

I don't know too many discretionary traders that could psychologically handle such a situation, but if you are truly trading probability, you are taking every signal, 20 losers in a row should not phase you, because you know the probabilities are the next 80 will most likely be winners.


Last edited by monpere; February 18th, 2012 at 07:04 PM.
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  #12 (permalink)
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monpere View Post
A lot of traders mention using probability in their trading, yet those traders are discretionary traders. If you are relying on probability to trade, then you have to take every single trade that your method signals. The moment you use your discretion to cherry pick even one trade, then the numbers you spent so much time calculating go right out the window, they become meaningless.

There are no absolutes in trading for the most part.

If I analyze my last 1000 cash trades, it gives me a fairly good idea at what my next 1000 trades might look like. Cherry picking is not a factor so long as I continue my normal routine. If you drive the same way to the grocery store every week, it is not cherry picking if you change lanes 3 times vs 5 times, or if you hit 3 green lights vs 2 red lights, or if it rains vs is sunny. The factor is you drive to work the same way every week.

The behavior of a discretionary trader (at least me) is the same.

Mike

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  #13 (permalink)
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Those who risk the same $ amount even as their account shrinks seem to be focused solely on how much money they can make, and not how much they can lose.

For you to continue risking $500 after your account has gone from $10,000 down to $5,000 is case in point. You are so fixated on trying to earn back losses, that you are now only a handful of trades away from completely blowing up your account.

If you were to use a percentage of account size, and trade appropriate markets and instruments for that risk, then you can shrink and grow as your account shrinks and grows.

Mike

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  #14 (permalink)
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Big Mike View Post
There are no absolutes in trading for the most part.

I take that back. There is at least one absolute: every trader is different, has a different opinion, different method, and different outlook on their trading vs the trading of others.

Mike

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  #15 (permalink)
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I think you got it wrong, both are important as we are not robots or we are not all trading mechanically. If you suffer 6 losses in a row or whatever number but it takes you 12/14 winners to recover everything then it is logical to think it is much more taxing psychologically than recovering in 6 attempts. In my opinion, the fixed % is a myth that is perpetuated in most trading forums. I think you should read what monpere wrote about it. This is how i see it and you would need strong arguments to convince me of the contrary.


Big Mike View Post
Those who risk the same $ amount even as their account shrinks seem to be focused solely on how much money they can make, and not how much they can lose.

For you to continue risking $500 after your account has gone from $10,000 down to $5,000 is case in point. You are so fixated on trying to earn back losses, that you are now only a handful of trades away from completely blowing up your account.

If you were to use a percentage of account size, and trade appropriate markets and instruments for that risk, then you can shrink and grow as your account shrinks and grows.

Mike


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  #16 (permalink)
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Big Mike View Post
There are no absolutes in trading for the most part.

If I analyze my last 1000 cash trades, it gives me a fairly good idea at what my next 1000 trades might look like. Cherry picking is not a factor so long as I continue my normal routine. If you drive the same way to the grocery store every week, it is not cherry picking if you change lanes 3 times vs 5 times, or if you hit 3 green lights vs 2 red lights, or if it rains vs is sunny. The factor is you drive to work the same way every week.

The behavior of a discretionary trader (at least me) is the same.

Mike

You can be a discretionary trader and cherry pick every trade, that is what the overwhelming majority of traders do, but you cannot cherry pick and think it is based on probability. The moment you make the decision to skip a valid signal for whatever reason, the probability equation is void. You are trading on some instinct that has little to do with probability. Is that a valid approach? Absolutely, 95% of traders will agree.

In terms of variable risk. If you take one signal and risk $100 because you think it is a low 'probability', and then you take another occurrence of that signal 3 minutes later, but risk $1000 because you think it is high 'probability', then if you are among us mere mortal traders, you will not be in this business for long, because no matter how high you think the probability of any certain trade is, even if you think it is 1000%, it can loose, and you never know which one is going to win and which one is going to loose, so if you are trading based on probability and you believe in that probability, and you want to control risk, the safest way to do it is to take them all, and with equal risk.


Last edited by monpere; February 18th, 2012 at 10:07 PM.
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  #17 (permalink)
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I use a little over 1% on entry. As the trade progresses, I may get up to as high at 5%.
On average I'm a little under 2%.

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  #18 (permalink)
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monpere View Post
You can be a discretionary trader and cherry pick every trade, that is what the overwhelming majority of traders do, but you cannot cherry pick and think it is based on probability. The moment you make the decision to skip a valid signal for whatever reason, the probability equation is void. You are trading on some instinct that has little to do with probability. Is that a valid approach? Absolutely, 95% of traders will agree.

In terms of variable risk. If you take one signal and risk $100 because you think it is a low 'probability', and then you take another occurrence of that signal 3 minutes later, but risk $1000 because you think it is high 'probability', then if you are among us mere mortal traders, you will not be in this business for long, because no matter how high you think the probability of any certain trade is, even if you think it is 1000%, it can loose, and you never know which one is going to win and which one is going to loose, so if you are trading based on probability and you believe in that probability, and you want to control risk, the safest way to do it is to take them all, and with equal risk.

I am discretionary trader. I trade the same strategy for years (with some adjustments). I do take every signal my strategy gives me, just with different risk profile based on probability. I do not think it is a low or high probability, I know it. Sure it is still a probability, I do not know if the trade ends as a winner or looser.

I do not agree with that generalization. You may be right, that predetermined fixed risk might be the safest way. Maybe. However I do not agree that risk should be determined by percentage or fixed amount of trading capital. Let say your trading capital is $5,000, your risk is 1% and you trade ES. Safe? Hell no. What you actually trade in this case is noise and there is high chance you loose your capital. Risk should be determined by other factors than fixed amount of dollars you can afford to loose. We all know how different is having fixed $200 risk on let say CL compare to ZN.

Of course I agree that 10% of predetermined fixed risk is plain stupid. Whatever I wrote about not having fixed amount of risk does not negate other factors. I am well capitalized and my risk on any trade is never higher than 3% (and that I already consider a high risk). I just do not have any percentage or amount fixed and same for any trade on any product I trade based on my strategy.
If you spend thousands of hours in front of screen and have your strategy tested (and you are not switching to new holly grail or miracle indicator every other month) you know there are trades with higher probability and higher RR. Let me give you a simple example - you are PNF trader. You take long trade on double top as well as on triple top. Are these the same probability entries? No - triple top is by definition higher probability trade than double top one. Do you know you'll get a winner? No, of course not.

As I've said before - predetermined fixed risk is better than no risk management at all. If you do not have enough experience or skills (as trading is a skill activity) or you lack psychological strength or discipline, this may be the best approach for you.
However feeling of having safe amount of predetermined risk is not a substitute for above or for well capitalized account or trading appropriate product in appropriate timeframe based on your capitalization.


Last edited by rani; February 19th, 2012 at 10:04 AM.
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Massive l View Post
I use a little over 1% on entry. As the trade progresses, I may get up to as high at 5%.
On average I'm a little under 2%.

What makes you change the risk from 1% to 5% after you've entered the trade?

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  #20 (permalink)
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Big Mike View Post
There are no absolutes in trading for the most part.

If I analyze my last 1000 cash trades, it gives me a fairly good idea at what my next 1000 trades might look like. Cherry picking is not a factor so long as I continue my normal routine. If you drive the same way to the grocery store every week, it is not cherry picking if you change lanes 3 times vs 5 times, or if you hit 3 green lights vs 2 red lights, or if it rains vs is sunny. The factor is you drive to work the same way every week.

The behavior of a discretionary trader (at least me) is the same.

Mike

Big Mike, I really like your analogy

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