Which risk management strategy do you think is better?
There are two concepts:
1. we assume $20,000 per contract and always trade the max size calculated this way (e.g. for $100,000 we always trade using 5 lots)
2. we assume 0.2% risk per trade and adjust the clip size depending on the stop level (e.g. for $100,000 we can risk $200 per trade; tick value $10 - if the stop level is 4 ticks we trade 5 lots; 2 ticks - we trade 10 lots).
Strategy 2. has the advantage of potentially creating huge winners but with less certainty. With strategy 1. the risk will vary slightly - on one occasion you will use 2 tick stop, then a 4 tick stop - both trades with the same size, which results in different loss in monetary terms.
One decides this on the basis of expectancy: each type of set-up one trades has its own expectancy (which you need to know, or at least to be able to estimate reasonably reliably), and you'd presumably want to risk more capital in the types that have higher expectancy?
I think this is related, mostly in the general term of money management for daytraders. I wrote this article a few years back after observing many different day traders in the futures field and I think it may provide some food for thought, ideas for risk per day type of approach. Survivor day trader.
PM with any questions about Cannon Trading (800) 454-9572 (310) 859-9572. Trading commodity futures, forex and options involves substantial risk of loss. The recommendations contained in this post are of opinion only and do not guarantee any profits. These are risky markets and only risk capital should be used. Past performance is not necessarily indicative of future results.