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This thread is to discuss the topic of which risk model you use, and why.
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The following 2 users say Thank You to Big Mike for this post:
on a trade by trade basis. I do not consider what % of account is appropriate because, for starters I do not enter a trade to lose money. In my mind, as soon as you put a $ standard you define that loss as acceptable...I will not do that. So stop loss is based on recent hi/low or reasonable s/r considering recent vol and vola and usually triggered by a deterioration in one of the entry premises.
Interesting that it seems as though many guys have an idea or opinion about the market and where it might be headed. I try very hard not to do that.
Great topic question Mike. This one should prompt interesting debate.
The following 2 users say Thank You to wldman for this post:
For me it's a fixed dollar amount per trade risk. It seems more logical than using a fixed %. The reason is simple, if you start with $10000, and drawn down to $5000, using a fixed % method, it will take you much longer to recover because you started out risking 2% per trade which was $200, but at the drawn down period, your only risking $100 per trade, so even if you have a good winning streak, your capital is recovering at half the rate it would using fixed $ per trade risk. Risking a fixed % per trade will eventually lead to over trading which is about the worst thing you can do for your bottom line.
I also use fixed dollar amount risk on every trade, through variable share sizing using the Van Tharp R-Multiple method. I risk the same dollar amount on every trade regardless of how big my stop loss is, by varying the contract/share sizing. Shares = RiskDollarAmount/StopSize. Keeping RiskDollarAmount fixed, when StopSize increases, then Shares decreases, and vice versa. That way I can trade a 30 second chart and a weekly chart with the same methodology, and the same dollar risk per trade, if I want.
Last edited by monpere; February 18th, 2012 at 01:15 PM.
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.