algorithmic 

as long as your equity is reducing , your risk will be INCREASED.if you 've a modest trading account of 10k and each time you risk only 100$,whenever your equity is 8k,then 100$ is not 1% of your equity . as you pointed, draw downs have additional pressure on mind , so they are additional hidden risk too

When you equity is 8K you should only risk $80

With fixed fractional position sizing and a fixed percentage stop in theory your account can never blow up - based on the above, risking 1% on a $10 account would imply risk of only $0.10 of the account. Subsequent losses would keep on decreasing the account, but since the $risk keeps on decreasing it can never reach zero.

However, that does not take into account slippage and commissions, but you should get the idea. Using fixed fractional position sizing with fixed percentage stops really gives you a cushion when you are not trading well. Only downside, coming out of a drawdown takes longer as trades taken are of a smaller size. That is a downside I can live with quite comfortably.

algorithmic 

real risk of trading is beyond profit or loss . you loose your time ,your best times that can be spend wit family ,friends, etc.. you glaze your eyes over charts and you will have a virtual life. you lose at least 5 years of your age in order to find a trading system. ( i can not believe anyone can find a system less than 4-5 years of trying hard) but speaking in terms of real risk ,there is no guarantee about the risk , even if you risk 1% of your equity ,there would be the possibility of 100 times of loss in a row.every thing is possible , so modeling risk in mathematical manner is just making yourself fool. Nichols Nasim Taleb (PHD in statistics)says : even in the best financial engineering departments in universities,there would be nothing more than wrong ideas and pseudo science . some years ago two Nobel Prize winners of Economy science ,started a investment fund in USA. they implemented all modern theories and mathematical aspects of controlling risk .but their fund fell in the market .as a human we can not measure "real risk" of anything.trading is not an exception

I remember watching Chris Rock in a standup where he talks about job and career. career is something you aspire to do , you have the passion for it and it is part of who you are. job is something you do to earn a living, just to survive. When we model our behavior, I usually look at the great ones who are able to strike a balance in all aspects of life and succeed tremendously. Honestly day trading is better than anything out there in the world for self improvement, if one is up for it.

My intention for this post was to look at the optimal mindset for trading, how you look at risk and loss from a probability point of view using a system with positive expectancy. IS there a probability for anything else to happen ? absolutely yes. One can always plan to contain the risk regarding other aspects of trade and life like getting a life insurance, umbrella insurance, choosing the right broker, setting daily loss limit for your account etc. But for the purpose of the act of trading itself, one has to learn to think in probabilities and look at risk and loss accordingly.

rahulgopi 

I realized that a lot of our conversation around Risk and Loss is not conducive for an optimal mindset for trading. As a matter of fact, the concept of risk and loss as we see in other life situations doesn't apply for trading. Understanding this will help us see the real opportunity in "Risk and Loss" while trading. Trading is based on probability. Any given trade has a probability to Win BIG or Loose Small. Loosing small is a mandatory requirement for Winning Big and letting the probability to work in the long run. As you can see any system with a positive expectancy will produce a profit in the long run Provided we take small looses on the way. It is how probability works. In conclusion, If you are using a system with positive expectancy and have the discipline to follow it, there is no Risk in trading, there is only Opportunity to either Win Big or Loose small in any trade for the greater good of turning a profit in the long run.

Someone has been reading Van Tharp or Ralph Vince.. Expectancy is one thing, but also don't forget the Risk of Ruin and the statistical t-score!!

Cheers,

Sody

deaddog 

When you equity is 8K you should only risk $80

after a while risking less than a specific amount is impossible.for example each candle in CL in 5 minute time frame has 15 ticks on average.so with 80 $ ,it's impossible to trade.the only way is to increase risk

grausch 

With fixed fractional position sizing and a fixed percentage stop in theory your account can never blow up - based on the above, risking 1% on a $10 account would imply risk of only $0.10 of the account. Subsequent losses would keep on decreasing the account, but since the $risk keeps on decreasing it can never reach zero. However, that does not take into account slippage and commissions, but you should get the idea. Using fixed fractional position sizing with fixed percentage stops really gives you a cushion when you are not trading well. Only downside, coming out of a drawdown takes longer as trades taken are of a smaller size. That is a downside I can live with quite comfortably.

you're rigth, but i wonder if these can still be applied to a modest trading account which can trade maximum 1 lots.
i think u meant risking 1% on a 10k $ account would imply risk of only ??? of the account ?

algorithmic 

after a while risking less than a specific amount is impossible.for example each candle in CL in 5 minute time frame has 15 ticks on average.so with 80 $ ,it's impossible to trade.the only way is to increase risk

Untrue.

Simply stop trading such a highly leveraged product like CL. You could trade the ETF equity instead USO. You could trade the micro QM. Another option would be to stop trading altogether until your account is properly funded.

Mike

SodyTexas 

Someone has been reading Van Tharp or Ralph Vince.. Expectancy is one thing, but also don't forget the Risk of Ruin and the statistical t-score!! Cheers, Sody

Van Tharp underestimated a lot of factors.he underestimated how difficult/time consuming it is to find a trading strategy and also REAL risk

Big Mike 

Untrue. Simply stop trading such a highly leveraged product like CL. You could trade the ETF equity instead USO. You could trade the micro QM. Another option would be to stop trading altogether until your account is properly funded. Mike

Mike,your words are correct and also my words are correct too.
reality can have different aspects/sides.i just said a scenario about trading a specific instrument and possibility of risk on that specific instrument.of course i know that a wise action would be stop trading but i supposed we want to trade an specific strategy with constant strategy .i think in that way our risk will be increased in drawdown period and will decrease in profit periods

Risk is the lifeblood of trading. In our bodies our blood carries oxygen and life to our organs. In trading Risk carries Reward to our accounts. Keeping the anatomy analogy Leverage would then be our blood pressure as it amplifies the Risk and Reward. As with our blood, oxygenation levels, and blood pressure there are levels that are considered healthy for our bodies. In trading the same applies. There are correct levels for Risk, Reward, and Leverage. A lot of people focus on r:r ratios and neglect leverage.

One of the biggest things as a trader that we must keep in mind is money management. And by that I mean real money management or position sizing. Position sizing determines how efficiently we are trading our risk capital. If we are inefficient in our position sizing, risk, and leverage then we increase the risk of ruin exponentially.