Ask Colin

I have capital of $50k. I risk 0.05% on each trade. Is this smart?

You are going the exact opposite way to what most people do. With $50k capital, I see people risking 2% or more. I think you are on the right track to risk as little as you can.

The key to building capital, especially when you capital is small and your brokerage a more significant drag on returns is to take low risk trades. Most people cannot do this. They want to trade today. So they risk more than they should. I have larger capital than you and my maximum risk is 1%. More commonly it is around 0.5%, initially.

However, what you say you are doing does not stack up. You are risking one tenth of what I am. That sounds good. However, if you have $50k, 0.05% risk means you are only risking $25. This is not sound. You are going to be stopped out all the time.

If you invest $1k, $25 is only a move against you of 2.5%. The only way you could set up trades like this is to try to pick low points in corrections, where your stop is very close. At a price of $1, the stop would be triggered on a move to only 97.5c. At higher prices, the move against you to hit your stop may be the minimum tick of 1c!

So, in summary, I think you are on the right track to keep risk small, but I feel you are going too far. You should be looking for buying points close to stop-loss levels, but the risk is that with such a small margin as you describe, you will often be realistically be buying against the trend on a decline at what you think is a trough. Dr Elder's method (see Come Into my Trading Room) would involve something approaching such a low risk trade when he puts in bids to buy near the moving average with the stop just below it. However, I don't think it can be done with such a close stop.

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