Risk Reward, or Just Risk?

[maxr 10]

There seem to be two main schools of adaptive position sizing (i.e. varying trade size with trade details) so far as I can see:

 

a) Variable Percentage Risk methods often use technical stop and potential gain figures to work out a Risk Reward Ratio figure, and thereby decide what total % of the account to risk on that trade - they might decide that e.g. RRR of 1.5-2.0 trades 0.5% max risk, RRR of 2-3 trades 1.5%, RR over 3 trades 2.5%, or whatever.

 

b) The Fixed Percentage Risk method simply sets a figure for max % risk on all trades, and calculates max total allowable loss per trade from account value. The trader sets an individual technical stop for each trade, and works out trade size by dividing max total acceptable loss per trade by the potential loss on 1 unit of whatever he's trading.

 

The Variable Percentage Risk method initially appeals because it allows that some trades have higher potential gain than others. However I remain to be convinced of the practicality of estimating potential return using most common methods (Fibs, channels, swing H/L, symmetrical price patterns)- it often appears to be an exercise in wishful thinking.

 

The Fixed Percentage method still allows variable position size based on the individual trade details (ie smaller required stop = larger position), but avoids guesstimating potential reward. Also, would you feel more confident taking e.g. 50 trades at 1.5% fixed maximum risk, or 50 trades at random max risk of 0.5% to 2.5%?

 

I'm leaning towards the Fixed Percentage method based on technical stops - I can see the appeal of the Variable Percentage method, but not how to estimate potential Reward with confidence.

 

What do you think, and/or what do you use?

 

Max

[SIUYA 11]

I used to be discretionary. i switched to more systemised and used both.....

personally i am going back to more discretionary - with the help of a system.....

This is because I trade various markets - over varying time frames.....equities, FX, futures, and occasionally through in futures.

Ideally to build a portfolio like approach, and be best suited to trade the equity (hopefully growing) I would favour the variable % risk.... but i have no evidence to mathematically support why.

the best info blog i have seen regards this info is Breakout Bulletin - July 2003

The blog was a wealth of info but sadly has not been updated for a while.

[Justaguy 10]

I much prefer the fix % risk. It is much easier to implement and I don't know if more elaborate, in the long run, is much better.

Keeping it simple makes sense for me. As my account grows, that % of my account that I can use for risk and position sizing stays the same but the position size grows. Is it the best way? I don't know. I have done zero long term testing on it.

In the end, it's about comfort level. Some may be find with the elaborate....I....like to keep it simple

[MadMarketScientist 11]

I'm on the fixed percent side.

 

I find it is easy and straightforward and can be calculated in an instant. Plus, it equalizes every trade for me - so if one trade has a risk of 40 pips or 4 points another another 25 pips or 2.5 points, for example, I know that I'm not having a bias to one or the other. It helps me treat each new set-up equally which is important in consistent trading.

 

MMS