Position size for a trade to be worthwhile?

I've been thinking about position size and also the size of my trading cash account.

Could someone tell me if my trades are too far on the low side for them to be even worth placing?

I won't bother with the entry / stop loss / percent details but once I enter the trade, place my stop loss and if I am to get to my target price then here is what will essentially be the case..

Here are some current trades..
Trade #1 Risk losing $100 (Plus commission) to potentially make $300
Trade #2 Risk losing $99 (Plus commission) to potentially make $272
Trade # 3 Risk losing $90 (Plus commission) to potentially make $549

I have a 1% risk per trade and starting with $10,000. I know this is on the low side. But this forms part of my question.

Are the odds against me already? For example, if I make 6 trades and 4 go bad, then the 2 good trades won't be enough to cover the bad trades. Get what I mean? I can't remember where I read it but I read somewhere that you should calculate assuming you will lose mores than win.

With a cash account as low as $10k and 1% risk, taking into account brokerage fees am I destined to just keep losing money this way based on typical lose/win ratios?

I know that my lack of trading skills is also working against me here but this isn't what I am trying to find out.. So lets assume I have a clear understanding of trading and am reasonable at it and have been doing it for years.. Is the $10k, 1% still too low and a recipe for disaster just based on my cash account being too low?

I hope i have explained my question clearly here


Thanks..


-Frank

Frankieplus said:

I've been thinking about position size and also the size of my trading cash account.

Could someone tell me if my trades are too far on the low side for them to be even worth placing?

I won't bother with the entry / stop loss / percent details but once I enter the trade, place my stop loss and if I am to get to my target price then here is what will essentially be the case..

Here are some current trades..
Trade #1 Risk losing $100 (Plus commission) to potentially make $300
Trade #2 Risk losing $99 (Plus commission) to potentially make $272
Trade # 3 Risk losing $90 (Plus commission) to potentially make $549

I have a 1% risk per trade and starting with $10,000. I know this is on the low side. But this forms part of my question.

With a cash account as low as $10k and 1% risk, taking into account brokerage fees am I destined to just keep losing money this way based on typical lose/win ratios?

I know that my lack of trading skills is also working against me here but this isn't what I am trying to find out.. So lets assume I have a clear understanding of trading and am reasonable at it and have been doing it for years.. Is the $10k, 1% still too low and a recipe for disaster just based on my cash account being too low?

I hope i have explained my question clearly here


Thanks..


-Frank

Click to expand...

Hi Frankie, it can be slightly higher % risked per trade than 1% so it's not a very strict rule. But what you have to understand is the higher % you risk per trade, the greater the draw-down (DD) in a losing streak. No matter how good your strategy is or how experienced you are in the markets, everyone is bound to have a lengthy losing streak one time or another.

You just have to work out how many losers in a row your system or methodology is going to have based on back-testing or paper-trading etc to get the statistics. Based on that you can adjust the % risk per trade and if you are confident that your system will not produce lengthy losing streaks then increase the % to around 2% if you are comfortable. So let's do some forward thinking based on that:

-If you use 1% risk per trade then if you have a losing streak of 100 in a row, you are out and your account balance will be zero.
-If you use 2% risk per trade then if you have a losing streak of 50 in a row, you are out and your account balance will be zero.

Both cases are simplistic and don't take brokerage costs or slippage (where a stock can gap down and lose more than the 1% risk planned).

So although 100 or 50 in a row is quite unlikely in a good trading system/method, around 20 in a row is quite a possibility and something that even the very experienced would plan for i.e. if you risk 5% a trade then the 'risk of ruin' is quite a possibility. So find your sweet-spot between 1% to 5% preferably closer to the lower end, remembering that most professional fund managers and traders will be risking less than 5% and they are still in the business after many decades despite 20%-30% draw-downs in their accounts at times due to losing streaks. Hope this helps.

I suggest to do some research on the 'risk of ruin' simulator/calculation. There are various online versions available, download one and play around with the variables (one of which is Starting Capital).
Brent Penfold has published Excel VBA for his simulator in his book Universal Principles of Successful Trading'. Nick Radge also covers the topic in an ebook 'Successful Stock Trading - A Guide to Profitability.
Some creative on-line searching will get you going.

aus_trader said:

So although 100 or 50 in a row is quite unlikely in a good trading system/method, around 20 in a row is quite a possibility and something that even the very experienced would plan for i.e.

Click to expand...

Hi thanks for your response.. This is what I was getting at, is I lose 20 in a row and my trades are all small, then I how many winning trades will I need to make up for it? Statistics will be against me it seems won't they?

I think you are right it's about the sweet spot. I will research this further.


-Frank

Joe90 said:

I suggest to do some research on the 'risk of ruin' simulator/calculation. There are various online versions available, download one and play around with the variables (one of which is Starting Capital).
Brent Penfold has published Excel VBA for his simulator in his book Universal Principles of Successful Trading'. Nick Radge also covers the topic in an ebook 'Successful Stock Trading - A Guide to Profitability.
Some creative on-line searching will get you going.

Click to expand...

Thanks.. I'll get on to the ebook sounds good.


-Frank

Frankieplus said:

Hi thanks for your response.. This is what I was getting at, is I lose 20 in a row and my trades are all small, then I how many winning trades will I need to make up for it? Statistics will be against me it seems won't they?

I think you are right it's about the sweet spot. I will research this further.


-Frank

Click to expand...

I think Joe90 also made some good points and Nick Radge is also a well respected trader and I remember him saying that he had his largest losing streak of 14 in his trading in one of his presentations. So my point is if a really well experienced trader like Nick can have 14 in a row, we mere mortals should at least aim for the possibility of around 20. So again back to some numbers:

-If you use 2% risk per trade then if you have a losing streak of 20 in a row, you are down 40% in your account and that would be around the maximum draw-down than I personally can handle without being pretty stressed out. Not totally ruined but it will require a few winners going your way to get back to break-even(BE) and a few more to eventually get into profit.

So do a bit more research and find out if this is what you can handle and if so you can increase the current % risked slightly

Hi Frankie,

What size positions are you going to be taking?

you need a sample size to see what your % winners are. I think you can easily risk 5% on a trade if it looks good like 70% chance of winning with 5:1 RR

TradeLikeTheWind said:

I think you can easily risk 5% on a trade if it looks good like 70% chance of winning with 5:1 RR

Click to expand...

While you can certainly put 5% of your portfolio into a position with appropriate stops, to actually risk 5% is pretty high. Markets go in cycles. Often a system that works well in a bull market, and where you're lead to believe you have a 70% chance of winning, will do terribly in a volatile, sideways market, for instance. 5% gives you 20 bad trades before you've blown up your account.

TradeLikeTheWind said:

you need a sample size to see what your % winners are. I think you can easily risk 5% on a trade if it looks good like 70% chance of winning with 5:1 RR

Click to expand...

Wow, amazing stats TradeLikeTheWind, I wish I could find a system with statistics like that

lenny said:

Hi Frankie,

What size positions are you going to be taking?

Click to expand...

My cash account sits at $50k but I am being cautious and using only $10k of it. I started trading with $30k but due to my stupidity removing a stop loss on an APT trade I lost $3k and am now treading lightly. Yes I know, never again remove a stop loss.

So 1% of $10k are my positions for the moment.. Sometimes if I see a good trade I might bump it up but generally it's like this for most of the time.

Examples of 3 of my positions..at 1% risk

999 Shares at 1.25 = $1248 Cost
Stop at 1.15 = Loss of $100
Target 1.80 = Profit of $550

250 Shares at 9.50 = $2375
Stop at 9.15 = Loss of $88
Target 10.70 = Profit of $300

909 Shares at 2.20 = $1999
Stop at 9.15 = Loss of $2.09
Target 2.50 = Profit of $273

Considering the chances of hitting my target, I feel I'm wasting my time in the market with these numbers.

Hence why I'm asking if this is how you all trade or if I should bump up my risk or trade with more money and half my stop loss amount. I know, catch - 22


-Frank

My view is any amount is worthwhile
If you can make a consistent profit from
Even very small amounts you will be well
Prepared for when you have larger capital bases.

CONSISTENT profit is more important than size.

Frankieplus said:

My cash account sits at $50k but I am being cautious and using only $10k of it. I started trading with $30k but due to my stupidity removing a stop loss on an APT trade I lost $3k and am now treading lightly. Yes I know, never again remove a stop loss.

So 1% of $10k are my positions for the moment.. Sometimes if I see a good trade I might bump it up but generally it's like this for most of the time.

Examples of 3 of my positions..at 1% risk

999 Shares at 1.25 = $1248 Cost
Stop at 1.15 = Loss of $100
Target 1.80 = Profit of $550

250 Shares at 9.50 = $2375
Stop at 9.15 = Loss of $88
Target 10.70 = Profit of $300

909 Shares at 2.20 = $1999
Stop at 9.15 = Loss of $2.09
Target 2.50 = Profit of $273

Considering the chances of hitting my target, I feel I'm wasting my time in the market with these numbers.

Hence why I'm asking if this is how you all trade or if I should bump up my risk or trade with more money and half my stop loss amount. I know, catch - 22


-Frank

Click to expand...

think of "target" as an upside limit

targets are a good idea, but, theyre a limit - this is your important point - price has no limits only rotations - in healthy price swings

you can argue that stops are a downside limit that must be applied to limit losses, sure, however upside limits will be the edge that adds to your downside, if you limit the upside you must by natural attrition add to your own downside even if that downside is not immediately apparent in print

i think you maybe well self-served by looking into this idea

if in those three instances, you've offered as a what-if, a target is reached and you exit on that target yet the price keeps rolling and does not cycle against you in (relatively large swing) then you miss out on that difference, then, if most of your other trades are target-hit or stop-hit then that difference becomes magnified even when it is not in print in numbers, it does exist and that is the difference, or, your edge you need to hone - in my humble opinion - this is what tech/a is referring to

this notion of letting your winners run can only have validity if you get two things basically correct:
first acknowledge that a stop is as arbitrary as not knowing where to get out when price runs in your favour, in other words, to avoid being stuffed by a thousand cuts (stops based on a linear idea applied to a dynamic price) and to allow your equity curve to swing north, re-focus on what makes a trend re-evidence itself, all trends engender an idea to you, so, when your cognitive and observed knowledge of how the trend is unfolding matches your level of gut knowledge (your endogenous GMTO reflex) then you'll have practiced enough to lift the odds in your favour of being right about sitting in the trend and seeing swings against you as being part of the gig of trend, stops are exactly the same thing, reflective.

knowing where a stop is valid is the same as saying you know the target where price will either keep running (on whatever form that "keeps running" occurs)

if you cannot explain the value of a trend move, it's relative size and the context of the play you've entered then the stop is valuable to the extent that the run-on position is not allowed to- well - run!

the idea that linear targets for both upside and downside will give you a consistant profit with trading Aus stocks is belied by the reality of trading a price that does not adhere to such things as targets they only adhere to themselves.

when a stop-target is hit and price rotates back into the trend, you were in prior to the stop, how valid was the stop-target?

when a bank-target is hit and price keeps going beyond, say, equal to the twice the distance of the
stop-to-profit targets, what is the loss you've made then? (this is the edge, that's important, i suggest, for you to consider)

the question then becomes : how well do you understand trend versus how well do you understand stop positioning within that trend, for that knowledge to outweigh the simple formula you've offered so far ?
the relative-ness of that is edge is easy to overlook

i typed all this 'stuff' because this:

trade I lost $3k and am now treading lightly

Click to expand...

you see, you want to apply this linear idea of protection, but, in its application the limitation neglects the probabilities, by taking out one of the mechanisms, that probability speaks of the limitation of cognitive knowledge gained from study - at least youre on a decent journey of what works and what doesnt

get at it

Good stuff here