Comments on: Relative Danger of Trading Account Sizes

By: uglychart.com » Blog Archive » Richard’s formulas for percent risk per trade and losing streak ruin

Mon, 19 Feb 2007 07:46:15 +0000

[...] One of my favorite trading blogs is Move the Markets and this article is an example of why I like it so much. I was just applying the formulas in his article to my ATS. As I mentioned before, we started with $10,000 and will begin risking 2% per trade (ironically this is the same percentage that Tyro’s friend used before he went bust). How many consecutive losses can our account sustain before dropping below $4000? Based on Richard’s formulas we would need 45 consecutive losses to drop below $4000 and 34 consecutive 1R losses to drop below $5000. I will be adjusting the risk per trade percentage down gradually to eventually 1% or below, as (or “if”) the account grows. So, if we can get to $20k (100% profit), with the new risk per trade it would take 39 consecutive losses to bring us back down to $10k. At $50k, it would take us about 70 consecutive losing trades in a row to bring us down 50% (to $25k). Basically we are hoping that we have built an ATS that is able to, with luck, grow large enough quickly enough before it runs into a streak of about 40 losing trades in a row. That’s not including commissions or slippage. If we were to start out risking only 1% per trade, we would have a much less chance of ruin. But here is a chart of what the account would look like after a string of 100 consecutive winning trades (with a fixed percent risk per trade): The blue line represents a risk of 1% per trade and the pink line is risking 2%. Obviously the growth is much faster with the higher risk per trade. It’s interesting to think about this because understanding and determining these variables is so important to the success of the ATS, yet it has nothing to do with the system that we made. The ATS that we programmed looks at stock price and volume. How important is that? Well, it has definitely been about 99% of the work, but really it just has to be good enough so that, with luck, it has a better chance of not running into a streak of about 40 losses in a row too quickly. [...]

By: How To Be Consistently Profitable in the Markets -- Move the Markets

How To Be Consistently Profitable in the Markets -- Move the Markets — Mon, 29 Jan 2007 00:18:46 +0000

[...] A positive expectancy means that if you took an infinite number of trades, you would have more money than you started with when you finished (assuming, of course, that you didn’t bust your account during a bad drawdown–see this article for more about the risk of ruin, and this article for more about comparing the risk at different account sizes). Similarly, a negative expectancy means you’d have less money after an infinite number of trades, and a 0 expectancy means you’d break even. [...]

By: Richard

Richard — Fri, 15 Sep 2006 21:44:35 +0000

@Ex: I am glad you liked it.

Yeah, I did the same thing (traded a $2k account for a while to get the basices). You are doing much better than I was back then, though! I was clueless…

This is another good reason why R and Expectancy are good ideas. Expectancy/R tells you about the quality of your trades. Even if your transaction costs eliminate all of your profits, you might be trading very well. Once you know your expectancy is good and consistent, you can make the jump to a big account with confidence. Suddenly, your transaction costs will be negligible and you will keep that money for yourself!

By: ExEngineer

ExEngineer — Fri, 15 Sep 2006 21:17:38 +0000

Awesome article!! Thanks for the small account equation.

I’ve been swing trading with a very small account (~$1200) to learn trading. I’ve been looking at my commission costs vs. my % portfolio risked. I want to stick to a 2% rule, but at $1200, the $14 round trip commission is already 1.2% of my account equity. Not a lot of room left for the trade. I had been eyeballing an amount to risk, somewhere around $50 per trade, near 4% account equity. Now with this equation, I can see (assuming $500 is ruinous and initial stake is $1200) that I’m at a roughly 20 consecutive losing trade blowout level. Naturally, pattern daytrading would call for a different account minimum, but I think that I could actually risk a bit more, like around 15 consecutive losses, about 5.5% equity.

Thanks again!

By: How to Tell if a Stock Trade is Good, or Not » Move the Markets

How to Tell if a Stock Trade is Good, or Not » Move the Markets — Thu, 14 Sep 2006 07:14:01 +0000

[...] The fact is, there are lots of ways to characterize the aggregate performance of a large sample of trades. It’s very important to keep track of your overall expectancy and risk profile, for example. It can be instructive to note if you are often leaving lots of profit behind, or underperforming the indices, or getting lots of sloppy fills, etc. But, all those considerations are meaningless when you just want to judge trade or two. [...]

By: Move the Markets » Blog Archives » Anatomy of a Stock Trade: Trading a Stock from Start to Finish

Tue, 05 Sep 2006 18:27:21 +0000

[...] For a more detailed explanation of the reasoning behind risking a percent of your current account size, you might want to read my article on choosing the right amount to risk, per trade, to fit your personality. [...]