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Thank for your suggestion, I will look into "Trade Your Way to
Financial Freedom" for detail
Thank you
Eric
--- In equismetastock@xxxxxxxxxxxxxxx, "Ed Hoopes" <reefbreak_sd@xxx>
wrote:
>
> For those interested, Van K. Tharp writes in "Trade Your Way to
> Financial Freedom" an excellent explaination of position sizing and
> risk management. Specifically you should refer to Table 12-4 in
> Chapter 12. A moving average crossover system is discussed where
risk
> is varied from 0.1% to 35% of the total portfolio value.
>
> At 2.5% risk level, the maximum drawdown is 29%
> At 5% risk, the max DD increases to 46%
> At 35% risk, max DD goes to 104% - ie your portfolio value goes to
zero.
>
> Put in simple terms, in a typical trading system, if you risk 1/3 of
> your portfolio on each trade, in a relatively short time you can
> expect to trade the account to zero. What actually happens is that
> after several consecutive large losses the individual simply stops
> trading - hopefully above zero equity.
>
> Even at the 2.5% risk level, few traders would be willing to keep
> trading a system where they would lose nearly 1/3 of their equity.
> THAT is why you see the 1-3% number come up.
>
> As an individual investor, I use a risk of about 0.8% - that
produces
> drawdowns around 10% - a number I can live with.
>
> Ed Hoopes
>
>
>
>
>
> --- In equismetastock@xxxxxxxxxxxxxxx, "Jose Silva" <josesilva22@>
> wrote:
> >
> > > Many people use 1~3% risks for their investment, but does anyone
> > > know why?
> >
> > No one knows what lurks in the minds of traders, otherwise we
could
> > preempt the public and become quite wealthy practically
overnight. ;)
> >
> > I suspect that the main reasons for a fixed (1%~3%) trade capital
> > allocation are based on a misunderstanding of risk, or an
inability to
> > measure and act on risk properly.
> >
> > The main reason for capital allocation (money management), is to
> > control risk to some extent.
> >
> > Allocation of capital (i.e., exposure to risk), should be done on
an
> > individual security basis. That is, look at individual trade
history
> > for each security, and allocate x% of capital to it according to
> > historical risk.
> >
> > For example, a risky/volatile stock may require caution and a
smaller
> > capital outlay, whereas a more stable/trending security with less
> > historical risk, can cope with a larger trade size.
> >
> > In other words, don't allocate capital % on hearsay or fixed
> > percentages. Be smarter, and allocate capital according to
individual
> > risk exposure.
> >
> > More on this in the current issue of MSTT.
> > http://www.metastocktips.co.nz
> >
> >
> > jose '-)
> > http://www.metastocktools.com
> >
> >
> >
> >
> > --- In equismetastock@xxxxxxxxxxxxxxx, chichungchoi <no_reply@>
> > wrote:
> > >
> > > Many people use 1~3% risks for their investment, but does anyone
> > > know why? Does it have any approach to determine the risk level
> > > based on the performance of any strategy?
> > > Thank you in advance
> > > Eric
> >
>
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