Adrian Reid explains how to build a trading system that matches your actual risk tolerance. He uses 30% drawdown as his limit, risks under 0.5% per trade, runs multiple systems, and avoids leverage. Define what you can actually stomach losing, then structure everything else around that number.
I guess it comes down to what, understanding. What are you willing to tolerate now? What am I willing to tolerate? I'm willing to tolerate a drawdown up to 30%. Some might say that's not too risk averse. That's, that's kind of very aggressive. But that's my, that's my limit. But I have zero tolerance for blowing up. So there's under no circumstances am I willing to blow up my account and leave the game because I want to be in the game forever and I need to be in the game to support myself and my family and so on. So I have an extreme risk aversion to blow up and I have probably a slightly higher tolerance for volatility in the account. So you got to first of all understand as a trader, what are your tolerances? And so for everyone listening, it's like, first of all, okay, what's your drawdown tolerance? How much money are you trading with? Can you afford to lose it? Are you willing to have any risk of ruin if you are? Under what circumstances? You know, for my trading there could be World War 3 and an atomic bomb blow, go off somewhere and I'm not going to go out the back door. You know, I may not make a lot of money, I may have a big drawdown, but I'm still going to be able to trade another day because of the way I structure it. And once you understand your objectives, then it comes down to structuring a portfolio and risk management to meet those objectives. So for me, I don't use much leverage, if any at all, just a little bit to allow me some flexibility in my trades.
I risk a very small amount on each trade. So less than half a percent on each trade is what I would lose if I'm wrong. Typically depends a bit on the system because some systems want a slightly higher level of risk, some systems want a slightly lower level of risk to sort of maximize their performance. But low leverage, very small risk per trade, very broad portfolio of holdings. So I have low stock specific risk. I'm not willing to have 25% of my portfolio in one stock in case there's a bad earnings announcement and it gaps down or in case the stock, like, I don't know, Enron or something like that, there was some fraud and it blow, you know, it blows up or gets delisted. I want to avoid those sorts of situations. So very small positions, small risk and many different systems to kind of spread the risk of market conditions away.
