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For one, I would never in the world risk 10% on a first or any other trade!
imagine, the market gaps trhough your stop, now you are out 15%, believe me
psychologically only VERY few will take such strain. Besides risk of ruin is
close to certain there.
As a rule, whatever you think you can stand, in reality it will be about
half to a third of that which you will effectively feel comfortable with. As
a reminder, most professionals don't risk much in excess of 2-2.5% per
trade. I even do 0.5%, because that's the level I found over time I don't
bother thinking about, hence get no "freezing", "pulling the trigger",
"impulsivity", "overtrading" or "early exit" pbs, all of which plagued me at
some stage because I was in it carrying too much risk..
Gwenn
Andrew Peskin wrote:
> (I apologize as this is somewhat long ...)
>
> I would like to start a discussion on the merits and weaknesses of the
> Fixed Ratio position sizing method popularized by Ryan Jones.
> Specifically how does it stack up against the other predominant position
> sizing method known as Fixed Fractional.
>
> The majority of the research I have conducted was based upon the fixed
> fractional method, or sizing your position based upon the risk the
> position represents and the percent of your total equity you wish to
> risk.
>
> For Example:
>
> You have a $100,000 account balance and wish to risk 10% of your account
> on each trade, or $10,000.
>
> You have an S&P Trading System which buys on a breakout of the highest
> high of the last 5 bars and sells on a breakout of the lowest low of the
> last 5 bars. You would reverse your position with each occurrence. (I
> am not advocating this system, nor have I tested this, I am only using
> it as an example).
>
> Your first trade has a risk of $2,000 so you would trade 5 contracts
> (10,000 / 2,000 = 5).
>
> Your first trade is a $750 winner so your account balance is now
> $103,750.
>
> Your second trade has a risk of $4,250 (the market has a greater 5 day
> range) and you would trade 2 contracts (103,750 / 4,250 = 2.44 ==> 2).
>
> You would continue this as long as you traded.
>
> The above makes sense logically to me. With the Fixed Ratio Method, I
> see some Problems:
>
> 1. How many contracts do you trade on your first trade? The method
> explains how to change your size once you have begun trading, but I am
> unclear on how to size your very first trade.
>
> 2. All trades are sized the same. Why would you want to risk varying
> amounts of capital? In the above example if you were trading a fixed 4
> contracts per trade, you would assume risk of $8,000 on the first trade
> and a risk of $17,000 on the second. I do not understand why different
> trades should represent differing amounts of risk for your account if
> the outcome of each trade is unknown and as the same probability of
> success or failure.
>
> I hope that this is a good start for an educational discussion amongst
> ourselves regarding what many consider the most crucial aspect of
> successful trading. I am looking forward to following the ensuing
> dialogue.
>
> Best regards,
>
> Andrew Peskin
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