<div class="bbWrapper">Position sizing is a large and complex subject.<br />
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The standard "rule of thumb" is that you shouldn't risk more than 1% of your account on a trade. Or 2%. Or 0.5%. Depends on who you ask.<br />
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The thing is, all those are totally random numbers pulled out of a hat (or less appealing orifice <img src="/community/imgs/emoticons/em-rofl.png" class="smilie" loading="lazy" alt=":rofl:" title="ROFL :rofl:" data-shortname=":rofl:" />). They "probably" will be safe for "most" trading situations. Maybe. Though you might be leaving a LOT of money on the table.<br />
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IMHO the correct way to approach this is to analyze your trading history. If you make money over time but any particular trade could be an enormous loss, possibly way more than 100% of what you supposedly risked, then you should be very cautious. But if you have a history of consistent wins and limited losses, you will greatly increase your profits if you get more aggressive in your position sizing.<br />
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There are scientific, analytic ways to approach this. The approach I use is to calculate the Kelly fraction on my trading history. (Quick lesson: you can approximate Kelly by calculating AverageTrade/AverageWin. Go googling, or ask, if you want more detail.) That returns a fraction between 0 and 1.<br />
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That Kelly fraction is the "ideal" amount to risk, in order to maximize your returns over time. HOWEVER you might have to endure 90%+ drawdowns to get there!! Usually people bet at some fraction of Kelly, e.g. 1/10 Kelly or 1/5 Kelly. That also gives you a margin of safety in case your system goes into a worse drawdown than you ever had in your history.<br />
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So let's assume you have enough trades in your history to give a good statistical sample. You look at your history and you find your AverageWin (average of all winning trades) is $1000, and your AverageTrade (average of ALL trades, wins and losses) is $300. That says your Kelly fraction is 300/1000 = 0.30.<br />
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Now let's say you want to be fairly conservative, and you are going to trade at 1/10 Kelly. With your trade history your Kelly is 0.30, so 1/10 Kelly means you risk 1/10 * 0.30 = 3% per trade. If you want to get a bit more aggressive, you could trade at 1/5 Kelly, 1/5 * 0.30 = 6% per trade. Risking higher levels will increase your returns but it will also increase your drawdowns -- but with a good system the returns increase a lot faster than the drawdowns. (I know very aggressive traders who trade at the 1/2 Kelly level, but only with a small account so they can stomach the large drawdowns. I personally trade my FX system at 1/5 K but I might boost it to 1/2 K once I convince myself it's a reliable system.)<br />
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3% or 6% is a lot bigger risk than the "traditional" wisdom of 1% or 2%. But in this case you've calculated the APPROPRIATE risk level for YOUR trading style. If you continue to trade similarly to your history, that Kelly fraction should be a safe and appropriate risk level for YOUR trading.<br />
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BTW if you lose money in your trading, your AvgTrade is negative, so your Kelly is negative. Which says there is NO safe level of risk for that trading approach. <img src="/community/imgs/emoticons/em-smile2.png" class="smilie" loading="lazy" alt=":)" title="Smile :)" data-shortname=":)" /><br />
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I'm worried, that if I increase my risk, I will have a losing trade that will wipe out a large chunk of my account.
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</blockquote>You WILL.<br />
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BUT: would you rather take a 20% drawdown from $100k, or a 30% drawdown from $500k?<br />
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I've backtested over 1000 trades in my FX system. Trading it at 1/5 Kelly, my worst-case drawdown is about 25%. The returns are extremely good. If I boost my risk to 1/4 Kelly, my worst DD only goes up to about 32%, but my returns are 50% higher. If I risk 1/2 Kelly, the worst DDs are around 55%, but the returns are almost ten TIMES higher than with 1/5 Kelly...<br />
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So. If you trade consistently (i.e. you can't change your strategy every month), and you have a significant number of trades to calculate your Kelly (I'd want at least 30, preferably 50-100), then the Kelly fraction tells you what level you can safely trade. I suggest you calculate your Kelly value, then enter your past trades into a spreadsheet and see how different risk sizes perform. Then decide what kind of returns-vs-drawdowns tradeoff you want to make.</div>
