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The $1,200 is his daily loss limit. He does not risk that on one trade. He trades 1 contract for every $300 (1/4 of his daily loss limit). The first trade (ES) with 4 lots loses 6 ticks / 1.5 pt for a total of $300 (4 x $75).
Because he lost 1/4 of his daily loss limit he scales down to 3 contracts and so on till 1 contract. As soon as his loss equals -$600 (trade 12) he goes up 1 contract to trade 2 contracts (1 contract for every $300 he still has). It's just about scaling down & up.
@syswizard: The number of contracts traded is on the right side above the zero line, it's not going negative.
If trading short time periods that does present a problem, most of my trading is done from the daily and weekly zones which are then watched on a lower time frame. I don't like trading 1min or 3 min charts. Too much noise for me personally. The other thing I',m currently trading from New Zealand and once I drop to smaller time frames I have latency issues, so better to use a higher period then I feel I'm not trading against algoes , and others who have better data than myself. It's just the way I have found it to work for me.
I have done this before, but it is certainly something that would require ongoing optimization, IMHO. I found on backtests that there was definitely a number of max consecutive losses which produced optimum results. Too many losses and you are throwing "good money after bad", and too few and your system stops trading before it would have gotten out of the hole.
I think it is important to consider how frequently your system generates signals, and when these signals occur in relation to the market cycle of your instrument.
if someone has a daily loss limit they are willing to lose and risk that much for the day! not sure how it can be put any differently what percentagew was the max drawdown of the loss limit? and this max drawdown would have continued lower if the mkt had continued lower. it is obvious saying 2 % of an account for risk is silly on all levels.
1) Which books?
2) Which people?
3) do that and account goes poof almost always. Common sense a beginner should even know.
4) brokers and exchanges love traders that ummmm ... continue trading for a looong time.
5) price goes where it goes and doesn't care about price targets (percentage-wise or by any other method)
6) using 2% allows one to have "some" losers. LOL not fifty.
&) see 5
IMO 5-10% or more is a surefire way to blow up. I speak from my own experiences and refunding several accounts. 2%-3% max daily drawdown. I can't say I've never broken these rules, but it helps prevent going on tilt and revenge trading if I adhere to them.
I trade about 12% of my account, for example. I trade option spreads. I have a small account $5400, and I'll buy a spread that costs me $700. So I know I only lose what I have invested - I prefer the low nightmare futures effect. Anybody else do this?