Quick Lesson on Risk Management

[#1]

For those interested in the ALSI and still learning heres some basics. If you have a system (e.g. Engulfing Candle) with a 50point stop loss that means that when your wrong (which happens 36% of the time - checked through backtesting) you will lose R 500.
That means to stomach that loss you need an account of (R500 per contract)/2% = R 25,000
So to trade 5 contracts on this (R 500 * 5)/2% = R 125,000.
Even more ideally rather round down by 1, so with 125k go for 4 contracts.

So for arguements sake you trade E.Candles @ 50points and occasionally chart patterns, then on an account size of R 100,000 you can trade 4 contracts (ideally 3) on EC.

The chart pattern however has 200point stop loss, so then you ADJUST your contract size down to 1 contract so your risk STAYS the SAME.

Hope it helps
Theres more on the site justonelap.com

[Rams]

yes may work for overnight positions but the risk on the ALSI futures is always imperfect for intraday trading....to have a stop at 200 points on one contract, the market has to move at least 400 points which happens but you need to be in at the right time, and will probably breakeven over time, but not make much money. I tried all the different combinations over the years. Even Simons 7/21 will not work for intraday trades. So i have come to this conclusion for intraday...keep the stop at Simon's 50 points per contract.I move to breakeven when profit on first contract taken. But the 50 point stop loss is tried and tested and I wish OST had a function where my 50 point stop is entered when i enter the ALSI futures trade.

[SimonPB]

an then the question is why does anybody even bother with intraday ?? it a mission and makes you tied to your screen .. I moving all my ALSI trading to end of day, been long since late Nov, much easier and makes for more surfing and drinking time ..

[Rams]

i prefer a good night's sleep.

[#5]

...again its an example, the 200 points is to illustrate a point on how to adjust your contract size to keep the same risk.

The 50 point rule deals with 1 mechanical trading system.
There are many, once you back test them you realize how 50points isnt a holy grail number, some variations Ive found, found that 75points increased the probability of target hitting by a LOT, but your targets had to change as well.
The trick is to understand risk, reward and probability of an event happening & not happening. And then to apply the rules consistently.
Every set of rules discretionary or mechanical comes down to this.

[kwagga]

Some folk earn all their income from daytrading, That's why they bother, I think.

[SimonPB]

so you give up your days screen gazing so you can sleep at night ?? what's the point ?? over night risk is not nearly as bad as most think it is, sure a crash overnight will ruin your morning, unless you're short ..

[SimonPB]

but kwagga I can make as much EOD trading (in fact I make more coz I tire when day trading so make errors), it is a total myth that real profits come from day trading .. real profits come from discipline trading, time frame is meaningless ..

shorter time frame merely increases number of trades, but decreases profit, loss should also decrease (but doesn't always) .. real winner is your broker

[SimonPB]

market crash happens from over sold position .. a trend follower will be short in an over sold market .. kaboom ..

[Rams]

i always assess my style of trading as more views are put forward,and improvise and I have done that with your 7/21 system but for the opposite reason, and that is to trade it intraday...and i sleep well

[#11]

A quote I like to remember from a Market Wizard:
"Systems dont need to be changed. The trick is for a trader to develop a system with which he is compatible." - Ed Seykota

[Rams]

agree, i trade different systems in different accounts. So if i decide to let Simon wreck my good nights sleep with an overnight sysytem, the system will trade in another account

[Rams]

i have a gap trading account, an intraday trend following account and now maybe a nightmare account!

[Rams]

is return dependant on risk? Benji Graham does not think so and Buffet turned Wall Street upside down by showing that he could get maximal return with least risk...maybe with investing. Graham thinks "return is dependant on the amount of intelligent effort the investor is wiling and able to bear on the task...The maximum return would be realised by the alert and enterprising investor who exercises maximum intelligence and skill."

[#15]

it depends how you define risk, as Ive noticed how CFAs define it differ to the layment, differ to me. CFA define it as volatility, the layment as the chance of losing money and I define risk as "entering into anything you dont understand", hence ALSIs arent that risky for me for another it is very risky.

So...yes, with my definition my returns are better with ALSI than they are on small caps, so my returns are dependant on my risk.

[Rams]

well, risk is "the potential loss"...in investment, or trading...what Graham is saying is that, the chances of you incurring that loss is dependant on intelligence and skill...in investing it may be reading the numbers, in trading it may be reading the charts....

[Rams]

and however you define risk, it comes down to loss?