The Benefits of Maintaining Fixed % Risk Relative to Equity for Long-Term Trading Success Discipline and patience are crucial in trading to facilitate the compounding of returns, as supported by the law of large numbers. Compounding can be achieved through a straightforward risk management principle: Maintaining a fixed percentage risk relative to equity. In the two-line chart below, I simulate the outcomes of 1,000 trades, showing consecutive 1R wins and -1R losses based on the simple principle of maintaining a fixed 0.3% risk relative to realized equity. This approach can propel your equity in a parabolic trajectory during a strong winning streak over a large trade sequence, while a losing streak results in a gradual decline as the dollar risk per trade adjusts automatically in line with the %-to-equity principle. Additionally, you get rewarded to increase/reduce risk in an automatic based on your trading performance without discretion. This risk principle carries a minimal risk of ruin at just 0.01%, making it highly valuable for testing strategies without the need to top up your trading account. Account Start: $100,000 Risk to Equity: 0.3% Dollar Risk (Start): $300 After 1,000 Trades Risk to Equity: 0.3% Dollar Risk (End For Win Graph): $1,337 (+$1037) Account End: $447,164 (Gain +$347,164) Dollar Risk (End For Lose Graph): $67 (-$233) Account End: $22,263 (Loss: -$77,737) I hope this post serves as a reminder of two key trading principles that are often overlooked in the context of long-term success: 'Treat trading as a business, not just a series of isolated trades,' and 'Focus on the process rather than the outcome of individual trades.' Do retweet of you find this post helpful.
this is the reason why you need to try to control your losses less than -1R losses via 3 stop strategy based on 33% stops per distance from your ultimate stop level. This big data principle will traject the parabolic effect on your equity curve at a much faster rate. I have not even touched on the magical effect of a 50R winner or a sequential 3-8R winner on the growth of your dollar risk and equity curve. You can't control the outcome of any trade, but you definitely can control your losses.
@jfsrevg yo hunter ride the crypto wave compounding is your tamagotchi
@jfsrevg The only reason I open twitter these days. A shame I'm so far away I would gladly take you for lunch. Keep it up and happy festivities 🎊
@jfsrevg jeff, is your risk to equity on a 1R loss around 0.3%? I am trying to find the sweet spot myself what a good number is to maintain as a % to overall equity if im taking a 1R loss...
@jfsrevg Thanks Jeff. May I ask where to find the 3 stop strategy post?
@jfsrevg yes, and the Fed bailing out the market helps.
@jfsrevg Hi Jeff, for either scenario, are you assuming a fixed $300 win/lose per trade for 1000 trades?