Please note that this isn't a critcism of Gizards earlier most excellent post, just an addendum letting you know how I approach some things.
The correct approach for each trader will be different.
My comments relate to my EOD trading.
Gizards points. 1) Set stops – never lose more than 15% 2) Never more than 5% of your capital in any one stock 3) 2% rule , never lose more than 2% of your capital in any one trade
I have a single process which relates to the three points listed above.
I size my positions on risk per trade, based on both account equity and recent market volatility.
I currently risk 1% of capital per trade and base my stop on the market volatility. This results in a different position size depending in how far away my stop is. Imagine it this way, a volatile stock might have a stop twice as far away as a less volatile stock, consequently the position size is half that of a less volatile stock. It means that I can take positions with stops that are 20%+ away, just smaller positions.
Even though I have a 1% risk per trade, it can still cause problems. In an EOD situation, I can have many more trades open than when DTing - I currently have 9 EOD positions open. Usually on a given day some of these trades zig and some zag, but there are the days when they all zag against me. On these days, even if I manage to get out at my stop ( and THAT isn't guaranteed), then I'm risking 9%+ per day (assuming stop on close).
Currently my largest position is 29% of my equity, and the smallest is 6%.
6) Never trade on leverage or margin. If you are good you don’t need to borrow. If you don’t have the money you aren’t ready
That's a good point, and more subtle than it seems. I do a lot of strategy back testing, and it is very rare that any system survives any leverage for any period of time. Even leverage as low as 10% has the potential to turn a winning system into a wipe out. A good system might survive a couple of months of leverage but it's similar to Russian Roulette with 5 chambers filled and one empty. It has to do with the standard deviation of returns, that's why hedged bond traders get away with leverage for so long. Google "Long Term Capital Management" (LTCM) to see what eventually happens with too much leverage - I think LTCM had about 25-1.
