Maximum risk percentage
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Maximum risk percentage


Psychology and Money Management

Created August 9th 2019 by reno57540
Updated August 23rd 2019 by lsubeano
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Maximum risk percentage

  #1 (permalink)
Potomac, MD
 
Trading Experience: Intermediate
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Broker/Data: TD Ameritrade, IB
Favorite Futures: QM/CL
 
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Maximum risk percentage

I have been trading a method that is giving reasonable returns and I am currently considering increasing my position size.

I have about $65k in risk capital. Even if I lost all of it, it would not affect my life in a dramatic way financially.

However, I have been abiding to the 2% loss per day rule, and since I am trading CL with a maximum loss of $1k per contract, it means I am never trading more than 1 CL contract at a time.

The problem is that it will take me years to be able to increase my position substantially to really make a relevant living at this job.

For that reason I am seriously considering increasing my risk per day to 4%, and trade 1 CL contract per $25k equity instead of $50k.


Things to consider:

- My maximum stop is rarely hit, as I always tighten it very quickly via a trail system. Most of my losses are usually around $500-$750 per contract, so even with a 4% max risk, my losses will rarely be more than 2-3%.

- My target is the same as my max loss, $1K per contract, but for the same reason as I rarely take a full loss, I also seldom take a full win. In general my risk/reward is about 1/1. This also means that I rarely have a very long stretch of losers.

- I take no more than 1 trade per day (some days I don't even get an entry), so not only would this be my max loss per trade, but it would also be the max loss per day.

I would be interested to hear people's thoughts, thanks for reading.

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  #2 (permalink)
Austria
 
 
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with only 1 contract trading, there isn't a lot of room to manage the trade (except the trailing-stop), in your case I would trade 3 contracts with 60 tick target und 30 ticks SL and take partials

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  #3 (permalink)
Legendary Market Wizard
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FWIW..


I don't have a forceful valid objection to the method that you outlined.

If you want to limit max dollar draw down per day, does that imply that you do not carry positions. I wonder if you decreased the number of ticks against you and increased the number of contracts traded if you would be able to swing and give your winners room to run?

The other thought would be to adapt some type of element that takes into consideration volatility, especially in /CL. Perhaps 2X the average true range of whatever period you consider your focus?

Best of luck.

-Dan

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  #4 (permalink)
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I would first want to know what my stats were exactly. Real figures. Max loss, average loss, winning% r/r. I would play with the numbers in a spreadsheet and see theoretically where I'd be trading at 2x average loss. It sounds like you're going to need a very high winning % with just a 1:1 r:r.

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  #5 (permalink)
North Carolina
 
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Here is the deal, you can risk way more then 2% and not blow out if you do not take serially correlated losses and have low probability of blow out at 2% risk. I think the real limit for most working edges is up from 4% to 9% based on my calculations per trade.

This is simple to prove. Why? Because if your risk of blowing out at 2% is tiny then a small/modest increase should not increase it too much. You can prove this to yourself by running monte-carlo simulations.

The problem is that if your edge quits working you will be in trouble and most traders struggle to trade well when down. The problem is you might think you won't care to take a 50% loss. This is common and then at 25% loss I know traders throwing in the towel. As well, any run of serially correlated losses can cause fast drawdowns. Because edges come and go, you might want to risk less than 2%. More over, you cannot fully control your risk in futures. It is almost assured that you will lose more then your "max risk" due to order entry mistake, stop loss, or software problems several times over your trading experience.

I cannot provide advise.

However, what might be most useful is to divide your trade idea up into many imaginary infinite number of plays/combinations/instruments and trade those with the extra risk instead of concentrating it. For example, let's say you go long 1 CL at the open. Instead of adding another contract, you might open a risk limited options spread with an outlook of 1-3 days. This way if your stopped out on your idea but market does move higher, your other play can still work out. The other benefit is you don't need to hold/risk giving back the entire profits of your futures position.

The key for this is you must have a good intuition or quantitative ranking for your trade quality and you must understand how the risk for the instruments work and how the spreads will change.

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  #6 (permalink)
Potomac, MD
 
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tpredictor View Post
Here is the deal, you can risk way more then 2% and not blow out if you do not take serially correlated losses and have low probability of blow out at 2% risk. I think the real limit for most working edges is up from 4% to 9% based on my calculations per trade.

This is simple to prove. Why? Because if your risk of blowing out at 2% is tiny then a small/modest increase should not increase it too much. You can prove this to yourself by running monte-carlo simulations.

The problem is that if your edge quits working you will be in trouble and most traders struggle to trade well when down. The problem is you might think you won't care to take a 50% loss. This is common and then at 25% loss I know traders throwing in the towel. As well, any run of serially correlated losses can cause fast drawdowns. Because edges come and go, you might want to risk less than 2%. More over, you cannot fully control your risk in futures. It is almost assured that you will lose more then your "max risk" due to order entry mistake, stop loss, or software problems several times over your trading experience.

I cannot provide advise.

However, what might be most useful is to divide your trade idea up into many imaginary infinite number of plays/combinations/instruments and trade those with the extra risk instead of concentrating it. For example, let's say you go long 1 CL at the open. Instead of adding another contract, you might open a risk limited options spread with an outlook of 1-3 days. This way if your stopped out on your idea but market does move higher, your other play can still work out. The other benefit is you don't need to hold/risk giving back the entire profits of your futures position.

The key for this is you must have a good intuition or quantitative ranking for your trade quality and you must understand how the risk for the instruments work and how the spreads will change.



This is exactly how I am feeling about the situation, and I couldn't have described it better.

I know my risk of ruin at 2% per trade is virtually inexistent (I hold trades overnight but never over the weekend), so it is probably extremely low at 4%. Additional I am talking about risk capital only, losing it all would only affect my ego and self confidence, and I could come up with more $ if I had to.

However, how am I going to feel if/when I am down 30%+. Am I going to be able to keep trading the same way?

This is really the only think keeping me from increasing my position at the moment.

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  #7 (permalink)
North Carolina
 
Trading Experience: Beginner
Platform: NinjaTrader, Tradestation
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Posts: 644 since Nov 2011

A good rule of thumb is to divide your max acceptable drawdown by 12. It is based on my experience testing systems in that most working systems typically won't have more then 12 losers in a row. And even if it did, you probably won't continue trading. If you take 30%/12 = 2.5%, 50%/12 = 4.1%, and 60%/12 = 5%.

You might look at fractional Kelly too. If you have a large enough account to use fractional kelly and adjust it, you are not likely to lose your account. However, you may prolong your drawdowns.

You mention you rarely take a full win, instead of risking more in contracts, you might be better off to buy an OTM spread when you think conditions are really conducive for a bigger win. This way you can take your profits as they come and still profit from more upside.


Last edited by tpredictor; August 10th, 2019 at 11:34 AM.
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  #8 (permalink)
Market Wizard
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reno57540 View Post
This is exactly how I am feeling about the situation, and I couldn't have described it better.

I know my risk of ruin at 2% per trade is virtually inexistent (I hold trades overnight but never over the weekend), so it is probably extremely low at 4%. Additional I am talking about risk capital only, losing it all would only affect my ego and self confidence, and I could come up with more $ if I had to.

However, how am I going to feel if/when I am down 30%+. Am I going to be able to keep trading the same way?

This is really the only think keeping me from increasing my position at the moment.

Traders ask me the same question that you posted a lot, and my answer is always focused on their psychology. Can they handle the more significant drawdowns?

I find that any transition you do has to be somewhat gradual, so in your case, where you have enough risk capital, open an additional account and trade $25K per one contract. Trade that for six months, and that experience would be more insightful than any advice given. You conquered a winning method, and that is an achievement. Please don't rush to become another statistic because it's better to keep the pace that you are on and win than rush and....you know the rest. You have been there before.

Matt Z
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PM with any questions about optimusfutures (800) 771-6748 (561) 367 8686. THERE IS A SUBSTANTIAL RISK OF LOSS IN FUTURES TRADING.
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  #9 (permalink)
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mattz View Post
...any transition you do has to be somewhat gradual...

Agreed. So, perhaps look at the QM product? Its in between a mini and a micro. Its liquid, but he will give up a tick or two from time to time. He's trading for 100t targets, so its a light headwind. The math will be unfriendly with its 2.5 cent tick increment. But a 2 lot QM will be a half step transition, compared to the 2 lot CL.

Or, go with the 4% and set a floor at some comfortable number. If the floor is reached, he can reassess.

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  #10 (permalink)
Potomac, MD
 
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mattz View Post
Traders ask me the same question that you posted a lot, and my answer is always focused on their psychology. Can they handle the more significant drawdowns?

I find that any transition you do has to be somewhat gradual, so in your case, where you have enough risk capital, open an additional account and trade $25K per one contract. Trade that for six months, and that experience would be more insightful than any advice given. You conquered a winning method, and that is an achievement. Please don't rush to become another statistic because it's better to keep the pace that you are on and win than rush and....you know the rest. You have been there before.

Matt Z
Optimus Futures

There is a substantial risk of loss in futures trading. Past performance is not indicative of future results.

Using my method, trading 1CL per $25k equates to a 4% max loss per trade, which is what I am considering doing. I currently trade 1CL per $50k.

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