Monday, 8 October 2007

How Do You Like Your Stake?

Since Last Post P/L: £168.46
Monthly P/L: £168.46
As the weekend offered slim pickings and after VJ had left an interesting question to my last post I've decided to finish off an old article I started back in March!
One thing I deem very important to manage is risk. This is an area that a lot of beginners to trading get wrong and subsequently find it very difficult to make profits. I'm confident that any trader who has been successful will say that risk management and in particular money management is crucial so I've always tried to make sure my stake sizes correspond to the size of my trading bank and the odds at which I'm trading.
If you're over-staking in relation to the size of your trading bank you're inviting a whole lot of trouble. If something goes wrong, sooner or later, one or two trades will wipe you out and that will be it - game over. You also feel a lot more pressure on how much you could lose which affects your perception of the market at any given time - these are all bad things which any professional can't have in their minds. You need to have a clear head, safe in the knowledge that you are not risking your livelihood and even if the worst happens you'll be able to come back tomorrow and start again. To use a poker term, "the trick is to stay at the table".
So, what is the correct stake size? This all depends on a number of things but some include; the size of your bank, the volatility of the market and the price of your selection. When I made the jump from punting to trading, initially I would use/risk up to 40% of my bank in any one trade (as my bank was £250 the most I would trade would be £100) . This was a worse case scenario as obviously I didn't intend to lose that much. The complete breakdown looked like this in relation to the odds available:
1.01 - 1.50 = £100 (40%)
1.50 - 2.00 = £67 (27%)
2.00 - 3.00 = £33 (13%)
3.00 - 4.00 = £20 (8%)
4.00 - 5.00 = £14 (6%)
5.00 - 6.00 = £11 (4%)
If you adopt this approach then it won't guarantee success but it will set you on the right path. Once you have these blocks in place the challenge facing you will then change to remaining disciplined at all times! What's the point of having a staking plan if you don't stick to it?!?! As my bank has grown I've gradually tried to reduce my maximum exposure and my stake sizes now look like this:
Trading bank = £5343
1.01 - 1.50 = £1015 (19%)
1.50 - 2.00 = £677 (13%)
2.00 - 3.00 = £338 (6%)
3.00 - 4.00 = £203 (4%)
4.00 - 5.00 = £145 (3%)
5.00 - 6.00 = £113 (2%)
As you can see, when the odds move so do my stake sizes. I believe this to be one of the fundamental reasons some new traders don't last - they don't manage their risk. For the record, I recalculate stake sizes at the beginning of each month and my aim is to get my maximum exposure down to 10%. I'm currently edging down by 1% a month so I should reach my goal in another 9 months!
Okay, now back to the boring stuff - my results from the weekend.
Rugby Union:
Leicester v Gloucester = £42.98
New Zealand v France = £33.51
Argentina v Scotland = £9.88
Detroit @ Washington = £20.43
Sri Lanka v England = £102.52
Without the Cricket on Sunday I wouldn't have had much to write home about and the rest of October looks pretty dire. The change in seasons always seems to bring uncertainty into my mind so I just need to bat it out and hope a big juicy opportunity comes along.
From a personal point of view life is hectic with every minute of the day being eaten up. If I'm not doing out the nursery then I'm flying all over the place with work but I guess nobody said life was easy :-)


Anonymous said...

hi mark

thanks for the info on stake sizing, i found it interesting!! on the staking front, did you reduce your 40% stake (£100) by 1% each month until you got it down to its current size 19%? also, if you entered a trade with £100 and that trade was going against you, how far, or what percentage, did you let that trade run before deciding to take the loss?


Mark Iverson said...

Hi VJ,

In the beginning I tried to decrease my stake size by as much as I could so I was down to about 30% by February.

With regards to your other point, the maximum I would look to lose in any one trade would be 2% of my bank but I try to get out as soon as I realise that things aren't going the way I planned.

I hope this helps.

Good luck!