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Futures
Trading 15
How Much to Risk?
by Malcolm Robinson
One of the questions a trader needs to
answer is: How much do I risk on each trade? To answer this question you need to know the
performance statistics of the strategy you are going to implement, or, even better, your
own performance statistics, based on your trading results to date (or the last few
months).
The statistics required are:
For example:
| % of Profitable Trades: |
40% |
| Profit Ratio: |
3 |
| Starting Capital: |
£10,000 |
In order to test out the
impact of risking different percentages of my starting capital, I have created a
spreadsheet that allows me to input the above variables and the percentage to risk. Based
on these figures I can simulate the results of 20 trades, over and over again, using
randomly generated results that conform to the entered variables.
For example:
| % of Profitable Trades: |
40% |
| Profit Ratio: |
3 |
| Starting Capital: |
£10,000 |
| Risk: |
3% |
In this scenario, I am
willing to risk £300 (3% of £10,000) on each trade. My average profit is £900 (£300 x
profit ratio) and my average loss £300.
| Profit |
Draw-Down |
Biggest Draw-Down |
| £1,200 |
-£1,800 |
-£1,800 |
| £3,600 |
-£1,500 |
-£1,800 |
| £8,400 |
-£1,200 |
-£1,800 |
| £2,400 |
-£1,800 |
-£1,800 |
| £4,800 |
-£900 |
-£1,800 |
| £2,400 |
-£900 |
-£1,800 |
| £6,000 |
-£1,200 |
-£1,800 |
| £0 |
-£2,100 |
-£2,100 |
| £6,000 |
-£900 |
-£2,100 |
| £0 |
-£2,400 |
-£2,400 |
| £6,000 |
-£900 |
-£2,400 |
| £2,400 |
-£2,700 |
-£2,700 |
| £3,600 |
-£2,100 |
-£2,700 |
| £2,400 |
-£1,800 |
-£2,700 |
| £2,400 |
-£1,200 |
-£2,700 |
| £4,800 |
-£2,100 |
-£2,700 |
| £1,200 |
-£2,100 |
-£2,700 |
| £2,400 |
-£1,500 |
-£2,700 |
| £2,400 |
-£1,500 |
-£2,700 |
| £3,600 |
-£1,500 |
-£2,700 |
The results above represent
20 groups of 20 trades, so in the first set of 20 trades the system made a profit of
£1200 and the draw down was -£1800 (the biggest fall from peak to trough in the trading
account). Over the entire 20 groups of trades we can see that the biggest draw down was
£2,700, which is 27% of our starting capital. If we increased the percentage of capital
to risk on each trade we would see an increase in profits and an increase in draw down.
What this spreadsheet allows me to do is
test out the optimum percentage of trading capital to risk on a given system. I can vary
the percentage until I have the right ratio of profit to risk that I am happy with.
Learn How To Trade The
Futures Markets
The Online Course Is Now Available!
http://www.TheMasteryOfTrading.com
Copyright © 2002. Malcolm E Robinson. All rights
reserved.
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