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> "Without practical application, all this is just so much bandwidth on a
> charting package's list."
>
> Well as usual Gitanshu, I have learned more from your and others posts
than I ever learn in the books that I have read. But let me be more
specific about why I am using the risk profile that I am.
There is not "right" answer in trading there is more of a "right" answer for
each individual according to his trading style and situation. FOR ME over
the last few years I have found that I do not have the mental discipline to
trade YHOO or any other stock the way that you described. I have read so
many techniques that I can show you bullish interpretations and bearish ones
as well for almost any situation. In addition, trading is a second career
for me. I have a "day job" and thus must limit myself to EOD position
trading.
Thus FOR ME I have found that mechanical trading works best. Although I
leave money on the table I ultimately come out better because I am able to
take the Buy and Sell signals that my system gives without question knowing
that statistically I should come out ahead. So FOR ME setting my risk as a
% of my total protfolio makes sense since I need to remain in the game long
enough for statistics allow me to make money.
My plan is this. I use a momentum system to get me into the trade,
calculate the total dollars that I risk on the trade based at 2% of my TOTAL
portfolio, then set the stop based on a % of the entry price according to
the volitility of the stock I am trading and then use the math to
determine the # of shares to buy. I then use a trainling stop that uses a
derivation of ATR with some spice thrown in to capture extrodinary moves and
special conditions for consolidations. I really don't like going out of a
trade with a trailer but I havn't found better results by testing with any
other combination of exits so far.
To determine what to trade I run the system against a large number of stocks
that are prescreened for volume and other characteristics and pick the ones
with the best performance against the system. Curve fitting? Yes
somewhat so, but as all stock traders know certain stock groups trade a
certain way and if a stock trades well against the system over a broad range
of stats (w/l ratio, Ave $ win, total rtn vs buy and hold etc) then it
should continue to at least for a while.
As to my definition of risk in this system, I have two definitions. The
first kind of risk is what I am risking of my original portfolio before
going into the trade. That is where the 2% comes in. The second kind of
risk is loss of profits within the trade. Since one of my goals FOR ME is
to limit the numbers of trades to a manageble amount I set my trailing stop
rather more loosely and accept a larger drawdown on the profit within the
trade in exchange for not being taken out on a pullback.
My plan is to develop another breakout system and then to trade the two in
tandem. I am studying various ones now and hope to put something into place
by the end of the year. I too do not believe in diversification for its own
sake. Go where the action is until it is played then go somewhere else.
Diversification is for the buy and hold types.
Mark
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