How much of your trading capital do you risk per trade?

[StockyGuy]

Someone just started a thread here saying they will risk 0.025% per trade.

I think conventional wisdom is 1-2%.

I think a discretionary trader who feels they're in the zone might risk 5-10% of their capital on a single trade.

What percentage is too much?

 

[willoneau]

Hi StockyGuy , did you read why i said 0.025%?
5% is extreme
10% is gambling

 

[Wyatt]

Conventional wisdom being 1-2% risk/trade avoids risk of ruin and this alone will keep you in the game long enough to work out if you do or don't have an edge in the market.

Dropping bombs on potential trades might be exciting but will separate you from your money over the cycle unless your timing/discipline is better than almost everyone else.

In hindsight this could have worked over the last 4 months and selected other periods in the past, but hindsight in reality is only available after the fact.

 

[Zaxon]

I think conventional wisdom is 1-2%.
What percentage is too much?

It depends on what type of investor you are. If you're strictly buy-and-hold, then, say, 5% per stock might make sense, because you'll hold it through thick and thin. And who's going to manage a portfolio of 100 stocks to keep the risk at 1%?

For all other investors and traders, I think 2% upper limit makes sense. Personally I use 1% excluding slippage and fees. So that works out to be 1 point something percent.

The other risk to consider is portfolio heat. What happens if the whole market drops at once? That could be 2% per stock multiple by the number of stocks you own, which is a far larger number.

 

[Value Collector]

Hi StockyGuy , did you read why i said 0.025%?
5% is extreme
10% is gambling

I am not a trader, I take longer term investment positions.

But in general I don’t want to be in more than 10 companies, and I may have 50% or more in my favorite one.

Limiting myself to 2% in each company seems crazy, I couldn’t possible know 50 companies as well as I could know 6, and once I got to that level of diversification I may as well just buy an index fund, and go to Disneyland.

 

[willoneau]

i think investing is a little different , when you say you can have 50% in one company do you buy with one order or scale in?
if you do scale in what % would be your first position?

 

[aus_trader]

I am not a trader, I take longer term investment positions.

But in general I don’t want to be in more than 10 companies, and I may have 50% or more in my favorite one.

Limiting myself to 2% in each company seems crazy, I couldn’t possible know 50 companies as well as I could know 6, and once I got to that level of diversification I may as well just buy an index fund, and go to Disneyland.

If there is one thing I've learnt over the years is there is no sure thing in the markets. Even the most researched investment that looks super solid and nothing could go wrong could disappear in a very short time. When things go sour, companies can spiral down quickly. Equity/Share price built up through decades could vanish almost overnight. I would never put 50% of my capital into a single stock.

1-2% is ideal but if you are starting small this may be hard to achieve. The minimum parcel of $500 required to buy on the ASX could easily mean you are risking more than 2%. So in this case it could be stretched to around 5% if you have tested and paper traded to prove your methodology.

 

[StockyGuy]

Thank you all, thread has ticked along nicely

It might be my bias/perspective or poor terminology, but risk per trade not about how much of your capital you put on a trade, it's a about how much you risk.

For example if I have 100% of my capital in one stock, my risk is still only 2% IF my stop loss is set to sell at the price that would deplete my total by 2%.

With buy and hold then yes it is possible you could end up with shares worth zero - so that's 100% risk if you put it all in one stock.

VC, would you ever sell based purely on a bad, sudden, drop, or would strong fundamentals always keep you in the position?

 

[aus_trader]

Thank you all, thread has ticked along nicely

It might be my bias/perspective or poor terminology, but risk per trade not about how much of your capital you put on a trade, it's a about how much you risk.

For example if I have 100% of my capital in one stock, my risk is still only 2% IF my stop loss is set to sell at the price that would deplete my total by 2%.

With buy and hold then yes it is possible you could end up with shares worth zero - so that's 100% risk if you put it all in one stock.

VC, would you ever sell based purely on a bad, sudden, drop, or would strong fundamentals always keep you in the position?

That is a big illusion you can get yourself into thinking only 2% is at risk due to a Stop Loss !

If you put your entire account (100%) into 1 stock then you are taking a huge risk. Although the chance of a good company going bankrupt overnight (Lose your entire investing capital scenario) is low, theoretically it can happen and occasionally it does. Market doesn't care you had a Stop Loss in the stock that never got executed when the company suspended trading and called in the Voluntary Administrators. Once this happens it'll be lucky if you get 10c in the dollar of money invested back and that's usually after years of waiting for the Administrators to pull apart and 'garage sale' off company assets and pay off all the creditors first before they check if there is any crumbs left in the pan to give back to the shareholders.

 

[StockyGuy]

That is a big illusion you can get yourself into thinking only 2% is at risk due to a Stop Loss !

If you put your entire account (100%) into 1 stock then you are taking a huge risk. Although the chance of a good company going bankrupt overnight (Lose your entire investing capital scenario) is low, theoretically it can happen and occasionally it does. Market doesn't care you had a Stop Loss in the stock that never got executed when the company suspended trading and called in the Voluntary Administrators.

Yes, good point. Maybe the CFD guaranteed stop loss would protect you more, but yes a huge gap, or indeed trading halt preceding the administrators coming in, will make you glad your position only comprised say 5-10% of capital.

 

[aus_trader]

Yes, good point. Maybe the CFD guaranteed stop loss would protect you more, but yes a huge gap, or indeed trading halt preceding the administrators coming in, will make you glad your position only comprised say 5-10% of capital.

Absolutely, mate we work too hard for earning money so don't want to gamble your entire account on one stock even if you think you've found the winner of the century.

Even a first time stock investor/trader should at least save up around $6000 before putting on a single trade I reckon. With $6000, a newbie investor can keep $1000 for trading costs for brokerage and for any data subscription costs and the other $5000 can buy positions in 10 companies of $500 equal size. That way if 1 company is wound up (a 10% loss), the account is not killed. Yes a 10% hit hurts but the other 9 positions could go up and make up for the loss. At least the account will survive to fight another day...

 

[willoneau]

I was with BBY once, along time ago in a distant galaxy.

 

[aus_trader]

I was with BBY once, along time ago in a distant galaxy.

I have also had the misfortune of holding the bag when a few collapsed over the last decade. These include Bandana Energy(BND), a law firm ILH Grp(IAW), Silver miner Cobar Consolidated(CCU) and Ceramic Fuel Cells(CFU). CFU still exists after de-listing apparently as a private entity since I get letters in the mail every now and then for voting in AGM etc but my stake is probably worthless now).

 

[willoneau]

bby was a futures brokerage firm I traded with

 

[aus_trader]

bby was a futures brokerage firm I traded with

Oh, I see. Found some info on them and when they went into Administration:

 

[tech/a]

My answer to this is as little as possible

The key word is Trade
The word missing is Management.

Sound trade management will minimise risk per trade.

Poor trade management will guarantee the initial risk taken.

 

[IFocus]

SG look up Risk to Ruin to get your head around the number of losses at different % to wipe out your account or permanently damage you mentally.

Also worthy of working out the probability of successive straight losses.

If you can get you head around it you will then perhaps get another piece in the risk management aspect

Been 15-20 years since I did all this cannot remember the numbers others here might can you Tech?

 

[StockyGuy]

I have also had the misfortune of holding the bag when a few collapsed over the last decade. These include Bandana Energy(BND), a law firm ILH Grp(IAW), Silver miner Cobar Consolidated(CCU) and Ceramic Fuel Cells(CFU). CFU still exists after de-listing apparently as a private entity since I get letters in the mail every now and then for voting in AGM etc but my stake is probably worthless now).

LOL I bought Arasor yonks ago - it delisted and changed name etc. I now get letters like that. They were gonna bring out laser TVs bwahahahaha.

 

[tech/a]

https://www.therealistictrader.com/risk-calculator/

Try this

 

[Value Collector]

If there is one thing I've learnt over the years is there is no sure thing in the markets. Even the most researched investment that looks super solid and nothing could go wrong could disappear in a very short time. When things go sour, companies can spiral down quickly. Equity/Share price built up through decades could vanish almost overnight. I would never put 50% of my capital into a single stock.

1-2% is ideal but if you are starting small this may be hard to achieve. The minimum parcel of $500 required to buy on the ASX could easily mean you are risking more than 2%. So in this case it could be stretched to around 5% if you have tested and paper traded to prove your methodology.

If I stuck to 1-2%, I would still be working for the man, instead I am the man, in my 30’s currently retired.