Being a day trader i still face the dilemma of what strategy should i use to contain my risk.
Better to have multiple trades but ensure small losses per trade where by i also risk hitting my stop loss too often
or should i allow my profits to run -- but having very few and selected entries?
One of the blog i follow mentioned this article at
Risky Business? Attitude Trader
Pasting the contents here.
|
|
Quote:
|
I contend that most things in and of themselves aren’t inherently risky. It’s how they’re dealt with that does or doesn’t make them risky.
Most people think trading is risky, but what does that mean? I think most people see it as “risky” because most people lose more money than they expect to while they’re trading. Of course no one wants to lose money but we already know that losses are part of the game. The problem arises when the losses are so big that they have a serious detrimental impact on one’s trading account.
Some simple maths* will show that by simply risking a very small portion of one’s trading account on each trade, one could take a substantial string of losing trades and still not be knocked out of the game. Which then allows the trader to be present for the time when their method is winning again.
Position sizing† is a term used for just this idea. It’s just another way of saying “risk the same size portion of your available capital on each trade.”
By knowing that the risk for each trade is small in comparison to the size of your account, it’s possible to put on a trade and not worry about whether it’s going to be a winner or not.
Conversely, risking too much is what leads to problems such as moving stops to break-even and getting stopped out prematurely, trailing a stop too tightly, or even using a stop so large that you think it can’t be hit because you can’t afford to lose money on the trade (I think there’s some irony somewhere in that one).
If the projected loss on each trade is well within reason then there’s really nothing to worry about and you can let the trade either move in your direction or not. That is unless you’re worried about the track record of your method. Then you should be looking at your expectancy††. But that’s another topic.
An approach as simple as this seems to make sense but why do so few traders do it? I think this is where good theory meets real life.
There are probably a million reasons why a trader wouldn’t risk a consistent and reasonable amount on each trade, but a few might be: using too little capital, trying to make a big score, not wanting to miss a trade, trying to replace/escape a former job and keep making a living, trying to avoid being wrong in a trade and therefore using a dangerously large stop, or simply not understanding what to expect from your method and where to appropriately place your stop.
There are ways to work through some of these things though.
Getting your personal life and finances in order first is a huge help and relief (I know this firsthand). Trading scared or over-your-head is a nearly guaranteed way to lose.
Trading a simulated account‡ is a very good way to get a feel for your method and an idea of what to expect from it. Why risk real money when you’re still not confident in what you’re doing?
Once you’ve become confident in your method, the need to risk inordinately large portions of your account on any one trade becomes minimised* because you understand that your method will make money over time – not just on this next trade. Once you’re confident in your method you begin to relax into the idea that it takes some time to make the money. And just like any other job some days will be better than others.
I think I’ve spent a lot of years putting the cart before the horse by trying to make money first and trying to understand proper trading second. It’s an easy trap to get into.
If you control your risk on each trade you can give your method a chance to work and give yourself a chance at success.
As a trader are you controlling your risk or making your trading a risky business?
|
02-03-2010, 03:06 PM
Risky Business ?
Linear Mode
