Registered User
Joined: 6/12/2005
Posts: 39
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Hi, as a relatively new trader my understanding of the point of PS/MM is to ensure that you have a sufficient number of opportunities to trade, to realise the statistical expectation of your system before being wiped out. In very simple terms if you only plan to risk 2% of your capital on any given trade you get 50 losing trades before you lose all your money (neglecting the fact that as your capital decreases, so does the amount at risk).
If you start with an account of $10k and are prepared to lose 2% on any trade (ie $200), and want to buy a share at $10 with a stop at $9 - then you can afford to spend $2000 on the trade (or 200 shares). What I don't understand is; does this represent the optimum position size, or should this be treated as a maximum position size (with any smaller size being acceptable)?
This question is complicated by by brokerage fees, if your paying a flat rate per trade there must be a minimum position size to ensure you cover your fees, but if you are paying per share (as I am) could you buy as little as you like?
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Registered User
Joined: 10/7/2004
Posts: 166
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My approach is simpler (for me to understand that is):
. limit each trade to $5-10K
. set stop loss at 3-5% initially move to 7% if it starts going the right way
. focus on the message in the chart (why arem I doing this trade?)
Re: Brokerage fees
I simply factor them into the cost of my trade so it is the loss I take and then my profit comes after that. I find it reminds me this is a risky business and helps keep me focused on "the why"
Happy Trading
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Registered User
Joined: 10/7/2004
Posts: 166
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QUOTE (teamaust) Hi, as a relatively new trader my understanding of the point of PS/MM is to ensure that you have a sufficient number of opportunities to trade, to realise the statistical expectation of your system before being wiped out. In very simple terms if you only plan to risk 2% of your capital on any given trade you get 50 losing trades before you lose all your money (neglecting the fact that as your capital decreases, so does the amount at risk).
If you start with an account of $10k and are prepared to lose 2% on any trade (ie $200), and want to buy a share at $10 with a stop at $9 - then you can afford to spend $2000 on the trade (or 200 shares). What I don't understand is; does this represent the optimum position size, or should this be treated as a maximum position size (with any smaller size being acceptable)?
This question is complicated by by brokerage fees, if your paying a flat rate per trade there must be a minimum position size to ensure you cover your fees, but if you are paying per share (as I am) could you buy as little as you like?
Team;
Two more things come to mind from your note:
. A 2% stop set at the beginning of your trade may tend to get you stopped out too often. Remember, on the other side of every Buyer there is a seller. Your 2% loss target may be someone elses target 2% profit. That is nirvanna for many active Day Traders. By making them risk their money a little longer (I've found 5-7% works for me) they give up and move on allowing the chart indicators to play out.
. At the other end, try to be clear what trader you are:
- Day, Swing, Buy & Hold
- Go Long, Go Short
These traders all can make money. Whath I'm trying to say is let the market tell you what can take. A $10K going to $9K trade would trap me into thinking I was in control and be taking a $2K loss. THATS a 10% LOSS! Most stocks that get to that level in the market I've been playing in over the last 4-5 years don't recover from that level back to my entry point (ie. in a reasonable timeframe for me to live on). They may come back to a 5% loss level then drop precipitously blowing by the 10% loss point.
Identify a method based on good chart reading using indicators, then apply simple practices (which you adhere) for entry and exit and limit your losses. Great Math skills don't help you to become a successful trader. I took a job interview with a major Financial Services firm last year and was given a "Math test." It turned out to be 6th Grade Arithmetic. I asked my friends in the industry and they all said "..yes, thats all you need!"
Happy Trading
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Registered User
Joined: 12/2/2004
Posts: 1,775
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teamaust, I'll give you my base method that I've been using for a good while now and feel that it has served me well. It is not set in stone but I do stick to it more or less:
*Never place more than 10% of balance into any single position.
*Never risk more than 10% loss on any single position.
This means that you never risk more than 1% of your balance on any single position. I think this keeps you well diversified (numbers wise if not sector wise) for risk control. And then 10% risk on each position gives you plenty of breathing room on your stops. That doesn't mean you give each entry price 10% downside before selling or stopping out, just the max. Or whatever price within that range the chart shows a failure of the setup.
And buying and selling each position in stages or pieces is also part of my method. Here is where brokerage fees came be very important. My broker charges only $1 per trade per 100 shares up to 500 shares, then .50 extra for ea. additional 100 shares. Thus I am able to build position in a stock in maybe 3 or 4 buys, then hopefully sell likewise in stages as it goes up. This really helps psychologically and monetarily if the trade goes against you early, as you only initially risked maybe 1/3 size full position and so loss is minimal. Then if the trade starts to evolve and look better you add to position, and so on.
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Registered User
Joined: 10/7/2004
Posts: 45
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Fpetry,
I started trading in 1969; it cost me close to 10 years and a million bucks to figure out the principles you've outlined in your post above; great stuff!
Those of us (I'm too old now) planning to still be in this game 37 years from now will do well to focus at least as much time on money management and personal trading discipline as we do on the nuances of PCFs and other formulae.
DavidBSchoon
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Registered User
Joined: 12/2/2004
Posts: 1,775
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DavidBSchoon, totally agree with you on the huge importance of money management and discipline, and teamaust is smart as a new trader to already be thinking seriously about it. But believe me when I say that I also have learned the hard way via school of hard knocks. And I still have to work at it to keep from getting sloppy. Coming here on these boards and yapping about it all the time to others helps me to stay focused. Happy trading to you.
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Registered User
Joined: 10/7/2004
Posts: 264
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QUOTE (teamaust) If you start with an account of $10k and are prepared to lose 2% on any trade (ie $200), and want to buy a share at $10 with a stop at $9 - then you can afford to spend $2000 on the trade (or 200 shares). What I don't understand is; does this represent the optimum position size, or should this be treated as a maximum position size (with any smaller size being acceptable)?
Teamaust, to answer your question, by keeping your amount at risk consistent you standardize your results. In other words, when you enter, you don't know which trades will work out and which ones will fail. If you all of your losses risked 2%, but all of your wins only risked 1%, your not getting the same bang on you positive trades. Take a typical reward/risk of 3/1. Trade 1, I loose $200. Trade 2, I only risk 100, and therefore only make 300, instead of 600 had I risked $200. So I think keeping you position size consistent is the better way to go. Good luck.
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Registered User
Joined: 6/12/2005
Posts: 39
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Brilliant!! Plenty to think about there!! Thanks everybody.
Golfman25 - exploring your example a bit more, after the initial entry, assuming the trade goes your way, do you keep your stop at the same percentage of your equity? ie if you were prepared to lose 2% initially, and the trade takes off (taking your equity with it) do you keep your stop around 2% of the new equity level? This would have the effect of tightening your stop as the stock price increases.
I suppose i'm now getting into the tricky, and individual area of exits aren't I.
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Registered User
Joined: 10/7/2004
Posts: 264
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Teamaust, it depends. First let me make clear that my stop is not set based on % of equity. My position size is. My stops are set based on average true range, chart paterns, moving averages, trendlines, etc. My position size is then determined so as not to risk more than 1 - 2% of equity. As the trade moves in my favor, I will usually take partial profits and vary my stop on the balance depending upon the chart. My goal is to maximize any profit, so as the trade moves in my favor, I might keep my stop wider than when I began, especially if it is a strongly trending stock. Good luck.
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Registered User
Joined: 12/19/2004
Posts: 457
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This is more appropriate for larger, or leveraged accounts, but is something to think about, particularly those who trade on the intermediate to long term trend.
Rather than put your maximum position on, place a fraction of that as an initial position.
Given what you posted above, it is worth thinking about putting on only 100 shares, and give the trade time to move in your favor. You can also diversify into a few other positions, since you are putting less money in any particular one.
Once the stock moves in your favor, say by breaking out over a key resistance level, then you can consider an appropriate spot to add to the position, bringing up your position to a full size.
As long as the stock continues to trend in your direction, there could be appropriate times to add to it, while continuing to trail the stop.
The idea is that you will find out your losers fairly soon after you place the trade, and since the position isn't as large, the loss will be smaller, while the gains on your winners will be larger.
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Registered User
Joined: 1/28/2005
Posts: 6,049
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I believe a starting trader should put the most emphasis on being correct about his or her trades. Being able to deal with the emotions involved. Having the discipline to follow your trading rules. Learning about technical
indicators. Finding the type of buy setups and stops that suit your personality and finding a trading timeframe that suits you.
One way to take the PS/MM issue off the table is to create a watchlist of stocks only in a specific price
range.
Lets say you feel you can handle 10 stocks---you
have a 20K account size--you create a watchlist of $15 to
$17 dollar stocks. (you cant go up to $20 because you need money to cover commisions and losses)
Every time you get a "buy" you simply buy 100 shares.
This will allow you to focus on trading and not MM.
If you are profitable in your trading and grow your account to 25K then you can create a watchlist of
$21 to $23 stocks. You can always adjust depending
on your results.
Once you gain experience and confidence and find your personality then you can open your world to MM and PS
and buy and sell stocks at any price.
Good Luck
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Registered User
Joined: 10/7/2004
Posts: 2,126
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One remainder to you all. The market pays you for taking risk. If you shy away from risk, you shy away from profit. Of course there is the other side - the less you risk the less you may lose.
With that said, I believe that stops are a necessity, but stops that are set at 2%, or 3% or any of that up to lets say 8% are setting you right out for failure. And of course we have to think of what type of trade you are doing, and how volatile the stock you are picking.
As I don't think this is a concern to daytraders or scalpers as myself, I would say that for those in a longer term trade anything out of the 8% below entry point will not let the trade breathe, and will drop you cold in more instances than not. And of course this is general, i would probably look at support and resistant levels in a stock to set my mental stops for a longer frame trade.
The ideas above are for the most part good, but it all comes down to one thing - Your Reward/loss is directly proportioanal to the amount of risk you take. You cannot change that with any posible formulation. You can leverage a trade with options for a long term frame, but that is a topic of its own.
So it all comes down to your Fear/Greed ratio. As I always say you make the market by yourself, therefore you are the market.
gook luck
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Registered User
Joined: 12/2/2004
Posts: 1,775
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Most of my stops are less than 8% and probably average around 4%. Room to breathe? Not very much. But if I'm stopped out and I'm wrong I sometimes buy back...could be at lower price but just as likely higher. But I really strive to get in initially at price close to what I think is optimum for the setup. Not that easy obviously, and therefore many times I can't get my so-called ideal entry price, but I compensate by putting on a smaller size in the position. And I'll add to position aggressively if it plays out in my favor.
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Joined: 12/18/2004
Posts: 180
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QUOTE (BigBlock) ...I would say that for those in a longer term trade anything out of the 8% below entry point will not let the trade breathe, and will drop you cold in more instances than not.
I think it should be mentioned that it could depend on how far the price has already moved in the direction of the stop (which would be down for longs, up for shorts). I often look at volatility, but let's say I'm looking to go long, and the price has had a recent significant correction within the context of what I define as the longer-term trend. Let's say my volatility method would put the stop at 4% below the current price, but the stock has already found support at only 1% below the current price. Surely, I would not assume that my stop should be placed at the 8% in this case. Right?
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Joined: 10/7/2004
Posts: 2,126
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Stmjd that is right. Like I said, I woulk look at the support levels (trend suppor?? intermediate support??, primary support??, etc.) to set my stop, and then consider the fact of how volitile is the stock in question, and look somewhat at previous activity. Base it on the term of the trade, etc., etc..
By the way, usually stops set at the support levels are taken out by market makers. You should stay away from where most folks would set it.
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Joined: 10/26/2005
Posts: 238
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I agree with BigBlock most of my picks last year have have done well some have doubled or better, but for the year I did not do all that good do to my stop placement being to close, I did not give the stock enough room to breathe. Now I look more to entering a trade closer to support and risk a wider stop. Seems to work better. (FYI I swing trade)
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Registered User
Joined: 7/30/2005
Posts: 51
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Here is a brief layout of the ATR trailing stop with position Sizing. The ATR basically shows the amount of volatility that a stock has over a period of time. I like setting this indicator to 14 days so ATR(14). Lets say you have 50K of money in your account. Determine what you are willing to risk on this trade. I never go above 2%. Lets say your risk tolerance is 1% of your 50K. You know that the most you will risk is 500. Now the next step is to figure out the ATR(14) for this example of BBY you can see the ATR(14) is 1.48. This simply means this stock had been moving about 1.48 over the last 14 trading days. Now you would not want to set your stop at 1.48 or you may be stopped out. Now all you have to do is Use a 2xATR stop. Simply multiply the ATR X 2. Now you have a stop of 2.96 from your entry. Assuming today was your entry day.
Now here is how to figure how much to buy. You know your risk is 500.00 on this trade. You know your 2XATR is 2.96 you now have the data to figure out how many shares you’ll buy. The Math is even simple for me to figure out.
500/2.96=168 shares. If you entered BBY at close today you now know that if you get stopped out you will be with in your risk tolerance.
BBY- entry 49.23
Risk 2.96
Stop 46.27
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Registered User
Joined: 7/30/2005
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Example of BBY was taken a while ago. I think this is simple and tells you HOW MUCH to buy based off risk!
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Registered User
Joined: 7/30/2005
Posts: 51
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Last thing about the ATR method. What you are basically doing is sizing your position based off volatility. If a stock has a daily range of 4.00 and you put your stop at 1.00 unless you’re a real sharp sophisticated bottom picker, ADX,CCI running dude you just might get stopped out in a few days. This stock gets you out of the noise of the market. Will you get stopped using this? Yes just like any stop. By doing this you know what your risk is before you enter. One of the biggest challenges I think that traders face is Money Management and I think this happens before you enter the position!!
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Registered User
Joined: 12/18/2004
Posts: 180
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Runner,
If you use a volatility method to determine risk/size, it might serve you better to wait for a period of low volatility to take the trade, and figure on entering after the trade has already begun to move in your favor, as long as you figure in a reasonable above (for longs) market maximum limit price + commissions into your cost, and do not buy above (for longs) that price. Kind of a theory that I have is that when prices are tight, nearby support already takes the maximum volatility limit into consideration. This may be especially good for smaller accounts. Just a thought.
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Joined: 12/18/2004
Posts: 180
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Not forgetting this, that is:
QUOTE (BigBlock) By the way, usually stops set at the support levels are taken out by market makers. You should stay away from where most folks would set it.
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Registered User
Joined: 12/18/2004
Posts: 180
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I'm only confusing the matter, sorry. I'll shut up.
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Registered User
Joined: 1/28/2005
Posts: 6,049
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It should be said as a reminder that volatility (ATR) and
position sizing are not linked. They are two seperate items.
Position sizing can be used with any stop method were you know your stop price ahead of time.
Lets say from the numbers above you can withstand $500
risk. You want to buy a stock at 30.15 and you plan to use a 7 percent fixed stop.
30.15 X .93 = 28.04 risk = 30.15-28.04 = 2.11
500/2.11 = 234 shares
Most things Ive read recommend a 2% position risk but,
I would recommend new traders goes as low as possible
1% or .5%
New traders should try to learn and keep it as cheap as possible.
Good Luck
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Registered User
Joined: 7/30/2005
Posts: 51
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QUOTE (Stmjd74) Runner,
If you use a volatility method to determine risk/size, it might serve you better to wait for a period of low volatility to take the trade, and figure on entering after the trade has already begun to move in your favor, as long as you figure in a reasonable above (for longs) market maximum limit price + commissions into your cost, and do not buy above (for longs) that price. Kind of a theory that I have is that when prices are tight, nearby support already takes the maximum volatility limit into consideration. This may be especially good for smaller accounts. Just a thought.
Very good point. Here is an example of this. Notice the Volatility indicators
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Registered User
Joined: 7/30/2005
Posts: 51
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Sometimes a picture is worth 1,000 words
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Joined: 12/18/2004
Posts: 180
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Registered User
Joined: 7/30/2005
Posts: 51
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QUOTE (diceman) It should be said as a reminder that volatility (ATR) and
position sizing are not linked. They are two seperate items.
Position sizing can be used with any stop method were you know your stop price ahead of time.
Lets say from the numbers above you can withstand $500
risk. You want to buy a stock at 30.15 and you plan to use a 7 percent fixed stop.
30.15 X .93 = 28.04 risk = 30.15-28.04 = 2.11
500/2.11 = 234 shares
Most things Ive read recommend a 2% position risk but,
I would recommend new traders goes as low as possible
1% or .5%
New traders should try to learn and keep it as cheap as possible.
Good Luck
Diceman, I have to disagree with your statement regarding Volatility ATR and position sizing are not linked.
One using this method I mentioned is sizing your position off the ATR. Using this method you do not have a fixed percentage as a stop because each trade will give you different stop value. Your risk will remain the same but your number of shares you buy will be based off the ATR. This is simply sizing your portfolio using Volatility. If one looks into this simple method I’m sure you might be surprised at how simple it really is.
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Registered User
Joined: 1/28/2005
Posts: 6,049
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Runner777
In some of the posts "ATR method" and "volatility method" were mentioned. To me this makes them sound like they are linked. If you use ATR as a stop method you MUST!!!! use position sizing.
My point was to illustrate that this is 2 seperate items
1 Using ATR to determine risk as a stop
2 Position sizing based on that risk
My point was #1 doesnt have to be ATR it can be something else. You can choose to use ATR but its
not required. I chose a 7% fixed stop only to illustrate
how to do the math but a moving avg level could have been used, a pivot point, a recent low all could have been chosen.
Position sizing is one thing how you determine your risk is another.
I hope this clears up my point.
Some food for thought. Dont be fooled into thinking because ATR is a calculation and a "fixed stop" is fixed
that the fixed stop is automatically inferior. The best
example I can think of quick is using your BBY example:
You bought at 49.23 with a stop of 46.27 that works out
to a 6.1% stop. With my 7% fixed stop I would use 45.78
(49.23 X .93) Lets say the stock drops to 46.21 then takes off to the upside. Your stopped out and I still have the position.
Remember even though ATR is changing its still a fixed percent at the time you apply it (6.1 in the BBY example).
The concept of having your portfolio risk adjusted to volatility sounds nice. The real question is ATR the perfect vehicle to do it? Are 14 days the perfect judge of your trades volatility? Is 2 the perfect multiplier?
What about standard deviation?
Im not trying to fault your method. Im just trying to illustrate that this is a complicated issue with many
pros and cons. If there was a simple stop method we would all be using it.
Good Luck
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Registered User
Joined: 12/2/2004
Posts: 1,775
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Sorry if already mentioned here as I scanned the posts, but another basic technique those new to trading may want to consdier is using more than one stop in a single position. I've alluded to scaling into and out of positions in pieces usually in reference to a profitable playout. Do it on the downside too is some situations. Have your first initial stop tight, maybe barely under support, and then a second looser stop for remaining half. A stress reliever too imo.
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Registered User
Joined: 4/6/2005
Posts: 9
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QUOTE (diceman) I believe a starting trader should put the most emphasis on being correct about his or her trades. Being able to deal with the emotions involved. Having the discipline to follow your trading rules. Learning about technical indicators. Finding the type of buy setups and stops that suit your personality and finding a trading timeframe that suits you.
It is my experience that it is better to do the opposite of what you suggest. In other words, I suggest that any trader (beginning or otherwise) put more emphasis on PS/MM than on when to enter or exit a position. The reason for this emphasis on PS/MM is that staying in the game for the long term is more important than any single trade. Proper PS/MM allows a trader to reach this goal. The market will take care of the trader (ie give them profits) but this can't occur if you are not in the game.
Another positive aspect of PS/MM is that it takes the stress out of finding that perfect entry or exit. I used to teach technical analysis and trading at Golden Gate University in SF. I found that my student's trading improved markedly by changing the emphasis from entries and exits to PS/MM. By emphasising proper PS/MM they suddenly realized that making a mistake with an entry or an exit had far less impact on there portfolio. This change allowed the students to relax. As a result, their entries and exits actually improved. I find it comforting to know that even if I total botch my analysis (which I sometimes do) that a trade will only result in a 1% or 2% loss in my portfolio. By doing this a beginning trader may actually become an experienced long term trader.
Best of Luck.
Dave W.
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Joined: 4/6/2005
Posts: 9
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Registered User
Joined: 4/6/2005
Posts: 9
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QUOTE (diceman) It should be said as a reminder that volatility (ATR) and
position sizing are not linked. They are two seperate items.
Position sizing can be used with any stop method were you know your stop price ahead of time.
Lets say from the numbers above you can withstand $500
risk. You want to buy a stock at 30.15 and you plan to use a 7 percent fixed stop.
30.15 X .93 = 28.04 risk = 30.15-28.04 = 2.11
500/2.11 = 234 shares
Most things Ive read recommend a 2% position risk but,
I would recommend new traders goes as low as possible
1% or .5%
New traders should try to learn and keep it as cheap as possible.
Good Luck
This description of how to properly size a position is excellent and all traders should have it printed and posted next to their computers. I would like to add some simple nuances to this description. I use the following terminology that will provide a new trader with useful distinctions. In my trading I use the terms trade risk and portfolio risk. The trade risk is the difference between the entry and the stop loss. In this example the trade risk is 2.11 per share or 7% of the entry price. The risk of this trade on the trader's portfolio is $500.00 or 2% of the trader's $25,000 account. Thus the $500 represents the portfolio risk. Through proper position sizing, even the riskiest trade will have a limited and known risk on a trader's portfolio.
I love the Worden's both Don and Pete. There technical prowess is incredible and their product is awesome. But they could do their subsribers a bigger and better service by explaining PS/MM and by adding it to their educational offerings. In the long run this would increase the Worden's business as it would be less likely that their subscribers would blow up and lose all their trading capital ending their need for Telechart.
Best Wishes, Dave W.
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Registered User
Joined: 12/18/2004
Posts: 180
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QUOTE (fpetry) Sorry if already mentioned here as I scanned the posts, but another basic technique those new to trading may want to consdier is using more than one stop in a single position. I've alluded to scaling into and out of positions in pieces usually in reference to a profitable playout. Do it on the downside too is some situations. Have your first initial stop tight, maybe barely under support, and then a second looser stop for remaining half. A stress reliever too imo.
I totally agree. I use more than one stop now, and still use PS/MM. I kind of a rookie at it, but I still do it. I base my size/risk off the maximum position stop, which is my estimate of the risk I take. But that doesn't mean I might not pull the trigger before that stop gets hit, or at least exit partial.
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Joined: 1/28/2005
Posts: 6,049
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Woodmai
I still think starting traders would be better served by learnig the basics of trading first. If they want to protect their assets I think they should use a more obvious money management system. Only trade a small portion of their account---buy very small share sizes--
only trade one stock. This would send a simple message
"your facing less risk because your putting less on the table".
I believe when they see a position sizing equation they
view it as a holy grail. Its OK if you are a bad trader
now this will protect you.
I think it has to do with the nature of risk and reward.
Everyone understands risk. Reward is a lot harder to define.
If you show a bunch of traders a stock that you owned and it dropped 50% they would all be quick to agree you
should have controlled risk. Should have used a stop-loss of 8% max.
Now show a group of traders a stock that went up 300%
last year. Ask them why they didnt buy it. You will hear things like---I mised the breakout---past my price target---I didnt want to pay up for the stock.
We explain away a stock with the type of returns we should want.
A trader using a volatility stop lowers the amount of shares he would buy confident he is controlling risk.
Not aware he is also limiting his profit if he is correct.
I think its much better to try and attack risk from the reward side of the ledger. Then to attack it from the risk side.
With position sizing a bad trader will still lose it will just be a slower process.
Good Luck
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Registered User
Joined: 7/30/2005
Posts: 51
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QUOTE (diceman) Woodmai
A trader using a volatility stop lowers the amount of shares he would buy confident he is controlling risk.
Not aware he is also limiting his profit if he is correct.
I think its much better to try and attack risk from the reward side of the ledger. Then to attack it from the risk side.
With position sizing a bad trader will still lose it will just be a slower process.
Good Luck
Diceman, I have to disagree with you again because if the ATR is not high then you buy more shares with the same risk. I think my example of BBY has you confused. Anyway the point of PS/MM is important and it needs to be thought out well before one just jumps in…most only look at finding the perfect entry.
Hey many ways one can control PS/MM and the more examples the better.
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Joined: 10/6/2005
Posts: 5
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I don't believe there're really any hard and fast rules as far as stops are concerned (such as 7-8% or 2xATR, etc.). It really depends on what type of system you're trying to trade, timeframe and what was the rationale for the entry. Stops should therefor be placed logically based on specific reasoning behind the trade. When one's risk tolerance is outside the stop - then don't take that position; and of course it's good to keep in mind that a lot of times (like with INTC most recently) stocks tend to gap up or down and the price you get may end up being not what you've expected.
Good luck
(and I my view someone totally new to trading should trade just a small fraction of the account for some considerable time, so any tuition paid to the market is minimized)
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Registered User
Joined: 12/18/2004
Posts: 180
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QUOTE (diceman) A trader using a volatility stop lowers the amount of shares he would buy confident he is controlling risk.
Not aware he is also limiting his profit if he is correct.
I personally would most likely no longer take a trade using any method that WOULD place my stop at 8%!!! The thing about using volatility is, that when volatility is low (relatively), the amount of shares you would buy should be much greater than your 8% fixed stop method, and therefore giving you a higher R/R than your fixed 8% stop method, provided that you have, as you stated in your post, defined the potential reward. As far as how do you define the risk using volatility is subjective. It could be a Bollinger Band squeeze/ensuing breakout, etc. But I would not go so far as to say it lowers the amount of shares you would buy! If used properly (again, subjective), it would raise the amount of shares you would buy. As far as your quote, "I still think starting traders would be better served by learnig the basics of trading first.", nobody made any reference otherwise.
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Registered User
Joined: 12/18/2004
Posts: 180
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Correction. It was stated otherwise above.
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Registered User
Joined: 1/28/2005
Posts: 6,049
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Runner777
In your posts you keep mentioning your risk is the same.
Thats true. Thats the whole purpose of the system, to
maintain constant risk. The problem is your talking about dollar risk only.
A trading system has three basic elements:
#1 Its batting average (how often you win or lose)
#2 Its profit (how much you make when you win)
#3 Its risk ( how much you loss when you are wrong)
The last one is what the position sizing attemps to
control.
While it attemps to control risk it cant eliminate it.
My point was as the system attempts to control #3 then
#1 and #2 can be impacted. By using risk control the
system will have larger share sizes when stops are
tight and smaller share sizes when stops are loose.
By using risk control lower share sizes can lead to
lower profit.
Every move you make has a cost. I once saw a successful trading system that had stops that were 10 X ATR. On
volatile stocks most stops were as much as 50% away from stock prices. Even though you could lose half your position, by lowering the probabilty that the stop would be hit, it gave time for stocks to grow.
Not sure what you mean about BBY all I used were the numbers you supplied.
Good Luck
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Registered User
Joined: 12/18/2004
Posts: 180
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If what you're saying is this:
When you set a wide stop and adjust you're position size accordingly, you take on less risk than setting a tight stop with greater share amount, I say you made a very good point. In most cases you are probably right on.
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