Risk Formula

Astronomical changes in Risk. How to Watch and Know your Risk-    

VIDEO risk and results 

In trading we all have a %win and a %loss per trade result and need to decide how much to risk, here are some examples so the choice will be easier.                                                            So what the heck is (1-(A-B)/1+(C-D))^E

If you have a 60% win rate (excellent) and you do not wish to lose more than 30% = your max draw down (loss) you have a great chance of surviving risking no more than 2% per trade (less than 1% chance of a 30% draw down) BUT simply dropping from a 60% win rate to a 55% win rate (still Good)  results in a 5% chance of a 30% draw down (loss). I know you still think that its OK so here it is -

MY scare tactic – Risking 3% per trade and a 60% win rate gives you a 2% chance of a 30% draw down (still OK) BUT our win and loss % changes from time to time and going to a 55% Win rate brings it up to a 13% chance of a 30% Draw down, not acceptable. Going to 4% risk per trade gives you a 22% chance of this happening and you see what I mean by-

Astronomical changes in Risk- 

Results (most are best off risking 1%) Max pain 30% loss  Formula is (1-(Win%-Loss%)/1+(Win%-Loss%))^sequential number of losses till your max loss point-this could be 15 for 15% or 25 for 25% at 1% risk. IF you decide to risk 2% per trade and your max loss is 30% then the sequential number of losses to get to a 30% loss would be 15

$30,000 account value trader wishes to not risk more than a 30% Draw Down (loss) and has a 60% win rate 40% loss rate (very GOOD)

Risk 1% (300) per trade (1-(.60-.40)/1+(60-40))^30 = (.8/1.2)^30  = .666667^30=.00000215173 so less than 1%  risk of a 30% draw down and the following are based off a $30,000 account

2% (600) risk per trade with a 60% win rate there is less than 1% chance of a 30% draw down

2% (600) risk per trade with a 55% win rate the risk jumps to 5% chance of a 30% draw down

3% (900) risk per trade with a 55% win rate the risk jumps to 13%* chance of a 30% draw down

4% (1200) risk per trade with a 55% win rate the risk jumps to 22%* chance of a 30% draw down

*completely unacceptable if you wish to trade.  “its easier to get in than out” Mark Twain

all numbers OAC these numbers are as close as I can do in my head without a calculator so there may be errors (I doubt it) but this is SERIOUS as far as risking money and your account.Take it from me- I have been there and done that. Link to Risk equation scroll towards the bottom of the linked page for the formula.

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