Position size and amount to risk

[Native_MetaL]

Hello
I wish to ask some questions about starting to trade.
For 2 years now I have studied options trading which have learnt a lot of theory about options and risk management of trading options.
I do feel that I would like to start trading stocks before I venture into the options market but I have little idea about money management when it comes to trading long stock positions.

Let’s just say I had a $40,000 account I have the following questions.

1. How much of this capital should a trader have active in positions at any given time 100% 80% 40%? I really don't know if having some of the account in cash is the right thing to do.

2. How much of the account capital would be sensible to place in any given trade IE 3% 5% 10% ? I don’t know what is a good position size for trading long stock positions.

2. And finally how much of a drawdown on ones capital would be considered sensible amount before cutting your loss on a trade.
Maybe someone has a simple formula for calculating a stop loss on a position or even a way to figure out how much of a given stock should be traded.
I am very keen to start trading and would really appreciate some idea on money management that other members use them self’s

Thank you

 

[Ken]

Heres some advice

BHP has risen 90% in 12 months.

Biggest stock on the ASX.

$40,000 with leverage invested in BHP 12 months ago and you have probly made yourself $100,000 and thats on paper, and you would be still holding, and not paying tax on it.

Worth thinking about.

Hindsight: sometimes the bargains are staring you right in the face.

 

[Whiskers]

Hi Native Metal

It's a broad brush you're swipeing here. I'm not a day trader or a strictly technical trader. Others may comment there.

I'm more invester than trader in that I prefer to work off good fundamentals and use the technicals for guidance. So from my investing perspective it may be OK to park it all in one thing, if you had a high degree of certainty, but generally I think most people would spread the risk a bit to three or four, but then you may find a real 'blue sky' thing that you like and feel it is only worth risking $1,000 on.

I find it generally pays to have some cash in reserve, some of the time, particularly if you intended to trade more often, to get those 'bargains' when they appear. The exact amount will depend on what is on your watch list, and how much weighting you decide to have with each stock.

I wrote a spreadsheet programmed to tell me what my returns would be with any share, dollar combination in gross, net, percentage and dollar terms. If you do the fundamentals for each company and get a ball park figure of potential values, this spreadsheet gives an instant snapshot of all potential returns for your watchlist.

As for stop losses, well we all hope we don't have any of them, but realistically for me, if the fundamentals change and the outlook (whatever term you are working with) turns for the negative, then the stop loss is basically ASAP.

I believe technical traders tend to work set percentages, but I'll leave others to comment there.

 

[$sam]

Hi all, this is my first post on this site, and I am on a steep learning curve, but have been playing shares for a couple of years now in a small way.

What I think I have learnt so far when starting out is, pick about 10 quality blue chip stocks and look at them every day till you get an idea on how they fluctuate from day to day, after some weeks or months when one takes a dip and drops about 5 or 10 % then buy it, 5 or 10 grands worth. I would try and always have some cash ready for that bargain that always comes up.

with 40 K, I would probably buy 8 x 5 k worth of blue chip over a period.

If a share has been going up rapidly over a few days, then this is the one I would avoid, they seem to then come down for a bit, and then I will consider buying it.

Also buying in the middle of the day seems the way to go.

Please correct me if Im wrong anyone. Cheers.

 

[tech/a]

If it were me which it was sometime ago.

Hello
I wish to ask some questions about starting to trade.
For 2 years now I have studied options trading which have learnt a lot of theory about options and risk management of trading options.
I do feel that I would like to start trading stocks before I venture into the options market but I have little idea about money management when it comes to trading long stock positions.

Go buy the book Mastering Risk by Mike Lally
ISBN 0 7016 3667 X

Let’s just say I had a $40,000 account I have the following questions.

1. How much of this capital should a trader have active in positions at any given time 100% 80% 40%? I really don't know if having some of the account in cash is the right thing to do.

2. How much of the account capital would be sensible to place in any given trade IE 3% 5% 10% ? I don’t know what is a good position size for trading long stock positions.

Then find youself a mentor/Educator who can walk you through the process of developing a trading method that you can prove returns a positive expectancy,in the process of learning your method and its NUMBERS you'll discover the answers to all the questions above

2. And finally how much of a drawdown on ones capital would be considered sensible amount before cutting your loss on a trade.

See above.

Maybe someone has a simple formula for calculating a stop loss on a position or even a way to figure out how much of a given stock should be traded.
I am very keen to start trading and would really appreciate some idea on money management that other members use them self’s

Thank you

The most common is Fixed Fractional position sizing.
Search it here or Google it.

Its in the book above.

 

[nizar]

Fixed Fractional position sizing

Lets say for the example you have a capital base of $10,000
and you wish to trade a $1 stock with the lot.
You dont wish to risk more than 5% of your capital on the trade.
So maximum risk is $500.

You like the stock and think that a 5c stop would be best.
So $500/. 05c = 10000 so you CAN buy 10000 with a 5c stop no problem.

Lets say you think its going to fly so you only have a 2c stop.
so $500/.02c = 25000 so you could maintain the same $500 risk and invest in $25000 of shares had you the capital.

OK lets say you wish to use a wider stop can you still buy 10000 shares?
So $500/.20 = 2500 obviously no you cant you must buy 2500 ONLY to maintain the same 5% risk with a 20c stop.

So same maths applies to any position you take.

$15300 capital, 5% risk how many shares can I buy of a stock trading at $1.92c with an 18c stop?

$ at risk = 15300 x .05% = $765.
765/.18c = 4250 shares 4250 x $1.92 = $8160 so you can ONLY buy 4250 shares at an 18 cent risk to maintain the same 5% risk to capital.

Ill go further and talk about Reward to Risk or the R/R ratio.

If you buy and then sell the $1.92 stock for a 54 cent profit you have returned on that trade a 3:1 R/R ratio.
This is calculated by 54c (the profit)/18c (The risk) = 3 so 3 times the risk has been returned.
So if you win 2 out of 3 trades with this sort of R/R ratio then your doing well.

Also in terms of books Mike Lally's I havent read it.
I have read one by Ryan Jones (Trading Game) and it does cover the topic of risk rather well. Search on this site there is a link to an e-book posted by RichKid ages ago.

Hope that helps.

 

[BBand]

Hi Native Metal,
You have done well to appreciate the need to understand Risk and Money Management.

I am a discretionary trader, I have rules for entry, rules for trade management, rules for exit etc - and they are all written in my trading plan.

There should be a section in your trading plan for Risk and Money Management - this is the most important part of your plan, and can mean the difference between being a profitable or losing trader - no matter how good your analysis is.

The need for money management comes from the fact that we cannot consistently predict what the market will do. The worlds greatest analyst cannot consistently pick winng trades - we all pick losers from time to time.

Our analysis should increase the probability of our trades being profitable - but the market may decide otherwise - so if we can't control what the market will do - then we should concentrate on what we can control - RISK

Risk is what we are prepared to pay (lose), if our analysis proves to be wrong. As demonstrated in Nizar's post.

There are two %ages that are important to my trading and these are:
2% of trading capital (this changes on a day to day basis, if you are an end of day trader) is the maximum risk that I am willing to take on any single trade.
6% of trading capital is the maximum risk that I am prepared to have exposed in the market at any one time.

Risk is potential loss, and is at its max. when you enter a trade - if price moves in your favour, your stop loss level approaches the entry price, at which point your risk becomes zero. (frees up capital to be used for an additional trade)

If I had $40,000 trading capital and was a new trader - I would only commit $10,000 to trading for the first year.
I would keep good records of all my trades - and learn from them!! i.e. what did I do right/wrong, what can I improve on etc. etc. Keep your trades small, if they are profitable - good, if they are losers - good (so long as you learn from them!!)

Another book that I would reccommend reading is "Trade your way to Financial Freedom" 2nd Edition, Van Tharp

Don't be in a hurry to start trading - as they say "the market will still be there to-morrow". There is a lot of useful information in the archives of this forum - take a look!

Learning to trade well, is a long and winding road.

I hope the above will be of help

Good trading
Peter

 

[tcoates]

You should find some useful information on this web site

http://www.stator-afm.com/fixed-fractional-position-sizing.html

Look at the links on the left hand side for other web pages re money management etc.

From the downloads page there is also a calculator

http://www.stator-afm.com/downloads.html

as as well as a pdf for position sizing.

Tim

 

[Wysiwyg]

Position size = number of shares to be acquired.

What I don't seem to be able to find is a money management table that does both below - with the rule I only want 5 positions open at any one time -

a) fixed % of total equity allocated to each position; 20% of total equity per position

b) fixed % of total equity risked; well that is dependent upon risk aversion but the common % bandied around is 2.

--------------------------

Using a) and b) above with $10,000 total equity.

a) $2000 is the allocation to every position. Obviously as the total equity (positions in profit minus (positions in loss plus commisions)) changes then the 20% (or whatever chosen %) dollar amount changes.

b) $200 is the total variable dollar amount risked per position. Obviously as the total equity (positions in profit minus (positions in loss plus commisions)) changes then the 2% (or whatever chosen %) dollar amount changes.

c) then adding the stop loss into this equation -----

The result of these rules is an approximately equal distribution of dollars per position and a fixed percent per position risked that gives us our position size in number of shares.

I have Stator AFM but their position sizing models don't combine the above rules.