With fixed fractional position sizing and a fixed percentage stop in theory your account can never blow up - based on the above, risking 1% on a $10 account would imply risk of only $0.10 of the account. Subsequent losses would keep on decreasing the account, but since the $risk keeps on decreasing it can never reach zero.
However, that does not take into account slippage and commissions, but you should get the idea. Using fixed fractional position sizing with fixed percentage stops really gives you a cushion when you are not trading well. Only downside, coming out of a drawdown takes longer as trades taken are of a smaller size. That is a downside I can live with quite comfortably.
The following 2 users say Thank You to grausch for this post:
I remember watching Chris Rock in a standup where he talks about job and career. career is something you aspire to do , you have the passion for it and it is part of who you are. job is something you do to earn a living, just to survive. When we model our behavior, I usually look at the great ones who are able to strike a balance in all aspects of life and succeed tremendously. Honestly day trading is better than anything out there in the world for self improvement, if one is up for it.
My intention for this post was to look at the optimal mindset for trading, how you look at risk and loss from a probability point of view using a system with positive expectancy. IS there a probability for anything else to happen ? absolutely yes. One can always plan to contain the risk regarding other aspects of trade and life like getting a life insurance, umbrella insurance, choosing the right broker, setting daily loss limit for your account etc. But for the purpose of the act of trading itself, one has to learn to think in probabilities and look at risk and loss accordingly.
The following user says Thank You to rahulgopi for this post:
Someone has been reading Van Tharp or Ralph Vince.. Expectancy is one thing, but also don't forget the Risk of Ruin and the statistical t-score!!
"The great Traders have always been humbled by the market early on in their careers creating a deep respect for the market. Until one has this respect indelibly engraved in their makeup, the concept of money management and discipline will never be treated seriously."
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after a while risking less than a specific amount is impossible.for example each candle in CL in 5 minute time frame has 15 ticks on average.so with 80 $ ,it's impossible to trade.the only way is to increase risk
you're rigth, but i wonder if these can still be applied to a modest trading account which can trade maximum 1 lots.
i think u meant risking 1% on a 10k $ account would imply risk of only ??? of the account ?
Simply stop trading such a highly leveraged product like CL. You could trade the ETF equity instead USO. You could trade the micro QM. Another option would be to stop trading altogether until your account is properly funded.
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The following 2 users say Thank You to Big Mike for this post:
Mike,your words are correct and also my words are correct too.
reality can have different aspects/sides.i just said a scenario about trading a specific instrument and possibility of risk on that specific instrument.of course i know that a wise action would be stop trading but i supposed we want to trade an specific strategy with constant strategy .i think in that way our risk will be increased in drawdown period and will decrease in profit periods
Risk is the lifeblood of trading. In our bodies our blood carries oxygen and life to our organs. In trading Risk carries Reward to our accounts. Keeping the anatomy analogy Leverage would then be our blood pressure as it amplifies the Risk and Reward. As with our blood, oxygenation levels, and blood pressure there are levels that are considered healthy for our bodies. In trading the same applies. There are correct levels for Risk, Reward, and Leverage. A lot of people focus on r:r ratios and neglect leverage.
One of the biggest things as a trader that we must keep in mind is money management. And by that I mean real money management or position sizing. Position sizing determines how efficiently we are trading our risk capital. If we are inefficient in our position sizing, risk, and leverage then we increase the risk of ruin exponentially.
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