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Registered User
Joined: 8/11/2005
Posts: 26
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I'm a novice trader and wanted to ask how do you manage your money between positions. Here's what I do and I'm sure there is a better because I'm not doing too well -
* The maximum position size is equity / 10 so if I have 60k this would be $6k
* I start with 2/3 position in a stock so $4k in this example
* If the stock goes up 6-7%, I add the remaining 1/3 -- $2k
* I set a trailing stop loss for 1/2 position at about 4-5% (I don't want to give up the profit but the stock might go back up so I set a loss on just half the position)
* If the above loss gets taken out, I set stop loss at entry price or sell at market if it has dropped below
Any suggestions are welcome
Thanks!
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Registered User
Joined: 12/19/2004
Posts: 457
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I don't like having a fixed percentage stop. A stop should be a function of the volatility of the stock in question.
A stop should also be set at a place where your initial analysis of the trade is proven incorrect.
Although I trade options, what I do when I buy stock is pick a particular chart point that would suggest my analysis is wrong, and then add/subtract 2-3% from that number. If the loss is too big for my comfort, I'll either pass on the position, or put in a smaller amount of capital.
I will also use a time stop. If a stock fails to move in a particular period of time (ie. 1 month), but hasn't hit a stop loss, and I'm growing impatient, I'll put in an above market sell order.
If I'm interested in adding to the position, I won't buy more than the original size of my position, and future additions will be even smaller.
Example. I had been long LU at around 2.85 back in May, as I was bullish on the market. LU moved up to the mid 2.90's, and I added 500 more. I had a total of 1000 shares. My initial stop was a key chart point of 2.80. A decline below that level was my inital stop.
I was approaching this as an investor, so I used the 21 week moving average as a level to watch. LU traded as high as 3.45, so I decided to move the initial stop up slightly.
In October, LU came crashing down. I exited the shares at the end of October at market, and was filled at 2.88. It moved below the weekly moving average that I set as my new stop.
For shorter term trades, if the trade happens to move in my favor, I'll use a trailing moving average, usually the 21 day exponential. My stops vary with my market outlook. The more bullish I am, I'll use a longer term moving average for the stop, but I usually stick to the 21 day average.
If the stock continues to move up, I'll continue to check the weekly, monthly, and daily momentum indicators. When I start to see price divergences, I'll use a shorter moving average as a stop, and I'll put an above market sell order at a resistance point, or Bollinger band. Check the April 6, 2005 Worden report for a description of how I'll gradually tighten the stop based on the indicators.
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Registered User
Joined: 10/7/2004
Posts: 264
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PV,
I'll second what rmr has to say. Don't just pick you stops based on some arbitrary percentage. At a minimum, base your percentage on the stock's volatility -- ie; a highly volitile stock may require a 10% stop, etc. You could also use a multiple of average true range. I would also make sure that your stop level makes sense in terms of support and resistance. In other words, make sure you level is on the other side of a support or resistance level, regardless of the percentage.
I would also add a position sizing function to your money management. Make sure you amount risked per trade if you stop out is 1-2% or less of your account equity. Then vary your share size based on that amount using the $6000 in your example as a max position. Good luck.
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Registered User
Joined: 5/17/2005
Posts: 221
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pv .... the percent of portfolio for each postion is great...but if you trust your analysis of the stock enter with a 100% position, otherwise you will miss the move of 6%..and in this market 6% is hard to make. If you want to enter a partial position then buy a 2/3 position and then add the other 1/3 as soon as you see the trade move in your favour. The stop should be set depending on where the support is for the stock and how volatile the stock is.
Being a novice trader the entry and exit to the stock is the most important item, although it is great that you have a plan for entering into a position you do not mention our plan for exiting a position. I found that when I started trading I wanted to get rich overnight and held onto winning positions only to find them reverse on me and become losing ones when I was stopped out. Now my focus has become to take profits whenever profits are there to be taken .. even if they are only $50.$50 in my pocket is better than $500 of my money in somebody elses pocket. I also find that when I go through a stage of losing positions I trade to make only small profits and mentally this heals me and gives me confidence again in my analysis and entry / exit stratergies.
I mainly day trade as my job enables me to do this, but do have a few swing trades when the longer term set up is right.
rmr's use of moving averages for stops is a great.... may be you could follow his/ her lead.
Do not worry that you are not doing that well as a novice trader ... I lost 75% of my portfolio when I first started to trade, learnt a lot of lessons along the way and now my profitability is increasing and I have recovered my losses plus some ...look at recent posting on CPST ... up 60% since Friday ....sold this morning on open and NVAX .... still in for 20% gain this week after buying on supprt , low cci and stochatics indicating oversold and doji.
Instead of focusing on money I focus on trading to trade well.....
Good luck out there.
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Registered User
Joined: 12/2/2004
Posts: 1,775
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Excellent post pv78 and superb replies. You are to be commended for striving to come up with a well planned methodology. I agree with those above who advise against using fixed percentage stops for the most part; however, there are occasions when a fixed percentage stop is wise. Such as after buying near the low of an extended lateral base of weeks or months. Sometimes in that situation there is nothing but open space below, i.e. no nearby support.
You and I are on the same page when it comes to maximum amount to place into any single position. I also adhere to the basic rule of 10% max per stock, but that is not set in stone…sometimes I may have 15% or so, but never ever 20%. I also like it because it forces me to diversify and minimize risk. You never know when a stock may crash overnight.
I really like your style of scaling into and out of positions in pieces, though my style is different. My first position size is usually ¼ to 1/3. And unlike you, if the stock goes up 6-7% I’m not adding, I’m probably selling a portion! I usually add after it’s up maybe 2%. Or, I may ad if the price falls to very, very near my stop, with strict dumping of all if stop is hit. Ideally I like to buy the first piece in tight congestion and add on the first little break out of resistance. An example is IVIL...I'm in now with 1/3 size and will add if it breaks out of triangle. Now if I was lucky enough to have bought first piece of a stock at low end of congestion, and the breakout above resistance is 6%+, then yes I may add.
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Registered User
Joined: 11/29/2005
Posts: 11
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This is an awesome discussion...
I am new to trading and the idea of a system, but I would say that ultimately the idea to pv78's question is: it depends. Ultimately your exit signal and position management are a part of your own style and your particular system. For example, if you are trading on a short term basis, then you want to consider tight initial stops. If you are trading longer term, then you need to allow for more volatility to keep from getting whipsawed out of the market. Personally I would start thinking about tightening/adjusting my stop after about a 10% gain as a rule of thumb. Again that is subject to your timeframe, but why let a profit go?
The same goes for positioning. If you are looking to go long for an extended period of time (weeks or months), then averaging up is probably a good strategy. Put a little money in early and wait for confirmation of your signal. If that confirmation comes, then add more money.
In the end, it really is up to you and your system.
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