How Much to Risk?

Guest contribution by Henry (experienced technical chartist) -:

Is there any such thing like a winning or losing mentality? My understanding is that if an issue relates to your state of mind, then it must be a risk or money management problem. I don’t believe there is a winning or losing mentality – you just take what the market dishes up. My trading was transformed with a risk/money management that I developed to fit my own circumstances. It might help you:

The general consensus among futures traders is not to risk a loss of more than 1% of your trading capital. That worked to a point but I still chickened out of some trades before the stop was hit. In other words I had lack of discipline caused by fear of losing more than I had already lost. The strange thing was that it only happened sometimes – not always. The 1% was not working for me. The problem is that if you have a lot of trades (say 20) all losing 1% due to a big market pull back then you could find that the cumulative effect is that you are down 20% of your capital. That was the crux of my problem.


Imagine an account of £100k – you are now down to £80k and have a few more trades moving towards their stop. How are you supposed to feel comfortable with that situation to the point of being able to maintain discipline. Each of us is different. We may have only our investment to live from and no chance of employment to top up losses or we may be in a situation where £100k trading pot is only six months worth of salary (I wish). The amount of risk between the two extremes is massive. So I found that instead of looking at % of capital I went for how much cash I was truly comfortable with losing. You have to be honest with yourself because we all hate losing and losing too much hurts. It’s that hurt that buggers up our minds and our trading.

This example is of my own equity spreadbet accounts which are for short to medium term trades of a few weeks to a few months and sometimes longer if a good trend gets going. The size of my account capital is not important. What is important is that I have only my investments to live from – apart from a smallish private pension. I cannot replace my losses other than from future winnings so I am only prepared to lose very small amounts relative to my capital. There are two sums you have to consider. The first is the amount of cash you are prepared to lose on an individual trade and the second is the amount you are prepared to lose from your trading capital overall.

Start with an individual trade. I am only prepared to accept a loss of £150. It doesn’t matter if its intra-day or end of day. Emotionally I start to feel gutted and panicky if the loss exceeds £150. At £150 I can accept the loss as comfortable and maintain discipline with my stop. I also know that my winnings to losers work out so that overall I get a profitable account because my winners will usually close out more than double £150. I only need a 50% win/lose ratio to be well in profit. Being honest with yourself and finding your true loss comfort level is the first essential – don’t be greedy, just be honest. You will now have a comfortable mindset to control your discipline.

The next issue is the stop setting. This is a subject of its own but I’m generally using the standard technical method of looking for the chart previous low. It doesn’t matter whether it is 5% away or 30% away, just accept it as being what the market is offering you. Again, I’m not interested in % but price (how many points away is the stop). We have the points from price to stop that we are risking but if we get stopped out we also have the spread to add to our risk price. The number of points (long trade) we are risking is the number from the current buy price to the stop price plus the spread (I call this my ‘Risk Price’).

Finally we have to determine how many £ per point to trade. £ pp = sum you are prepared to lose divided by the Risk Price. So in my case I don’t need to look at the stop. All I do is look at the spread betting account and as long as my trades are above -£150 I’m OK. If they hit -£150 I close the trade. There is a small flaw in that if I close at -£150 I will lose a bit more because of the spread. That’s fine by me – my account still wins. This whole thing is about the psychology of controlling risk and discipline.

Having got a discipline for individual trades you now have to decide what is the maximum you will be comfortable with seeing your total account capital lose. In my spread betting account I’m honestly comfortable with losing up to £3000 so the maximum number of open positions I can carry is £3000 divided by £150 = 20. This is only the maximum of positions – you don’t have to trade at all if you don’t want to.

I use a similar tactic with my equity purchase account and futures account. I look upon the above as a trading tactic rather than a strategy but it keeps the mind emotionally clear. Not too sure I would give money to a shrink.

As always this is what I do and is not advice for you to follow. You are welcome to use it or adapt it to find what works for you.

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