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.'
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