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| Jamie Dimon |
Risk is the only thing traders can control. We choose how much (if any) risk we want to accept at any given time. Any possible reward is subject to the whims of Ms. Market.
What is the proper amount of risk ? Opinions vary, but most professional traders I’ve come in contact with recommend risking no more that ½% to 2% of your account on any one position. Many daytraders (including myself) will also quit trading for the day if they lose more than, say, 1.5% on the day. Larger values make it much more likely that the account will soon be wiped out. Note that this percentage does not refer to “position value”, which could be a much larger percentage of the account. Risk is the amount which would be lost if your stop is hit, barring overnight gaps.
Before entering a trade, it is essential to determine the price point at which you will admit that you are wrong. The very first thing to think about is risk. If the risk is too large, you should pass up the trade. Don’t think about how much you could make - you have no control over that anyway.
As an example, let’s assume a $10,000 account and 1% max loss per position. So we will risk no more than $100 on a position.
Looking at a $20 stock, first determine where the “wrong” point is. Let’s say that support is 40 cents lower. Give it a little breathing room and use a 50 cent stop. In that case, the position should be no more than 200 shares ($100 / $0.50 risk per share). The position value is $20 * 200 = $4000 (40% of the account), but the risk is only 1%.
For an options position which will be held overnight, consider the entire position at maximum loss and size accordingly.
Manage your risk. Everything else will take care of itself.
What is the proper amount of risk ? Opinions vary, but most professional traders I’ve come in contact with recommend risking no more that ½% to 2% of your account on any one position. Many daytraders (including myself) will also quit trading for the day if they lose more than, say, 1.5% on the day. Larger values make it much more likely that the account will soon be wiped out. Note that this percentage does not refer to “position value”, which could be a much larger percentage of the account. Risk is the amount which would be lost if your stop is hit, barring overnight gaps.
Before entering a trade, it is essential to determine the price point at which you will admit that you are wrong. The very first thing to think about is risk. If the risk is too large, you should pass up the trade. Don’t think about how much you could make - you have no control over that anyway.
As an example, let’s assume a $10,000 account and 1% max loss per position. So we will risk no more than $100 on a position.
Looking at a $20 stock, first determine where the “wrong” point is. Let’s say that support is 40 cents lower. Give it a little breathing room and use a 50 cent stop. In that case, the position should be no more than 200 shares ($100 / $0.50 risk per share). The position value is $20 * 200 = $4000 (40% of the account), but the risk is only 1%.
For an options position which will be held overnight, consider the entire position at maximum loss and size accordingly.
Manage your risk. Everything else will take care of itself.