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No no. The idea is to risk 2% of the PORTFOLIO on the trade. You set the
risk on the stock seperately and then let the math give you the position
size of the trade.
Example:
Portfolio = $100,000 2% risk of protfolio = $2000
Calculated or estimated optimum risk on YHOO= 10%
Position size = $20,000, 200 sh of YHOO @ 100 with a stop @ 90
Mark
----- Original Message -----
From: "John Manasco" <john@xxxxxxxxxxx>
To: <metastock@xxxxxxxxxxxxx>
Sent: Thursday, July 13, 2000 8:26 AM
Subject: Re: Gap risk = critical?
> Gitanshu
>
> On the YHOO trade at $100 entry with a $98 stop that seems like a very
tight
> stop for a stock as volatile as YHOO. There have been times in the past
that
> $2 was just the bid ask spread. Of course if you're correct in your
> assessment of direction then the stop won't be hit, as evidenced by the
fact
> it gapped open. I guess my real question should be is a 2% risk on a
> position practical on a stock that can easily make a 10% move in a day?
>
> Your comments are appreciated.
>
> Regards
>
> John Manasco
> ----- Original Message -----
> From: Gitanshu Buch <OnWingsOfEagles@xxxxxxxxxxxxx>
> To: <metastock@xxxxxxxxxxxxx>
> Sent: Wednesday, July 12, 2000 4:46 PM
> Subject: Gap risk = critical?
>
>
> > >Based on the comment above aobut risk not being initial margin, how do
> you
> > >define risk?
> >
> > Amount of money you will lose on trade without impacting your ability
> > (financial and psychological) to continue trading after incurring a
series
> > of losses in sequence. Amount - at portfolio level - that will keep you
> away
> > from margin calls. Amount - at portfolio level - that will help you meet
> the
> > margin call should the extraordinary happen - without affecting your
> > lifestyle.
> >
> > Take your pick.
> >
> > >Yesterday Gitanshu talked about gap risk and extrodinary
> > >events making hard stops ineffective to define risk. Although i
> understand
> > >your point Gitanshu, extrodinary risk is just that, Extrodinary. Must
> we
> > >plan for the worst in all trades since it will only happen once in a
> great
> > >while, or shouldn't we use portfolio diversification to lessen the
> > >probability of catastrophic loss?
> >
> > I'm beginning to think this is getting theoretical... but one could,
> > theoretically, find a market without gaps and trade it. I think the
> returns
> > would be dampened since everybody knows there's no risk so why should
> there
> > be a risk premium, price volatility in your favor, etc.
> >
> > I presume we're still talking specific to equities, so the comments
below
> > are in that context.
> >
> > Portfolio diversification:
> >
> > Different traders have different ways - some don't diversify, and trade
> only
> > one market and one instrument in that market. They have to be very good
at
> > what they do. Turning points, chart pattern recognition, trade
management.
> >
> > Some trade only one chart pattern but different trade sizing into taking
> > positions from that chart pattern.
> >
> > That's some of us.
> >
> > I achieve it by using strategy diversification. But it stretches the
> > available capital already.
> >
> > Portfolio diversification is not how most of us trade since most of us
are
> > undercapitalized relative to where we want our account to be - and need
to
> > concentrate resources on 2-3 market/trade basis - nor do we have the
> breadth
> > of knowledge or the resource support needed to trade multiple markets
> large
> > sized positions or broken down positions like a mutual fund -
> > simultaneously.
> >
> > Portfolio diversification increases complexity of account management and
> > dampens returns while giving us the fool's paradise comfort of thinking
> that
> > we are also reducing risk. The risk remains the same - or more - and for
> > that, we trade in our superior potential returns achievable from
> > concentration.
> >
> > We're not a zillion dollar mutual fund to need diversification - most
> people
> > on this list trade under $1 million. You put $100k in 10 stock trades,
> > that's enough diversification already. On each of those $100k trades set
> > your stop at 2%, $2,000 - and you are a genius if you can catch all 10
> > entries perfectly and not get stopped out for a significant period of
> time.
> >
> > I kind of find it difficult to believe that traders - repeat - traders -
> > diversify too much beyond that, because the trends are just not there -
> the
> > moves these days are magnified within compressed time, agility is the
> order
> > of the day and therefore focus is desired, not the machine gun spatter
of
> > pick any stock, it will go in your favor - that existed in Fall 99.
> >
> > Re: Extraordinary risk offset by diversification:
> >
> > HOW DO WE KNOW that the "once in a while" is not right after we're in
the
> > trade? How is that answer any different from each trade we take, whether
> it
> > is adding to a position or to a new trade while having an existing
> position?
> >
> > I like to take care of each position against the fat tail event. I like
to
> > go into a trade thinking I know what I am doing, but knowing that I
cannot
> > possibly know it all and therefore ought to defend my stance against
> myself.
> > This applies only to stuff I carry home - and again I think the
questions
> > are theoretical.
> >
> > Over time I have come to employ a variety of strategies - let me
rephrase
> > that - over time, I have sequentially worked through, used, learned,
> > eliminated, modified and finessed my choice of instrument and strategy
to
> be
> > direction-neutral and make money to defined goals as opposed to getting
> > married to my belief in recognized chart patterns. When a direction
> happens
> > in the price action, my position takes me into it. There are times when
> this
> > strategy loses money - typically in tight congestions that last over 3
> > weeks. That is known. Hence I trade some other strategy in equal dollar
> > amount where I seek and find tight sideways markets with breakout
> > protection. This sometimes makes me sit out the breakout move from the
> > sideways market - sometimes, it is the move of the year - but I am so
> > focussed on preserving the thing on my position sheet that by the time I
> > realize it is the move of the year, it is over already.
> >
> > Case in point is the spring crash - I made some money, but I know I
> > should've made a lot more. The fact that a lot of people lost big money
is
> > meaningless to my P&L - or my ego. Being protected against a crash and
> > coming out of it unscathed by dollars or emotions is only half the job
> done.
> >
> > Thus, strategy diversification.
> >
> > I have come to view my trading as a profession that will last my
lifetime.
> > It is too much fun to want to do anything else. Therefore I am more
> > concerned that my capital lasts that long and that I don't screw it up
> with
> > one or two extraordinary disasters each year.
> >
> > I've been there, done that, and don't want to go back/do that. That's my
> > experience of what it takes - 1 or 2 bad trades a year that are real
> > bloopers - and it takes 5-6 months to bounce back. It gets compounded
> > because you trade small on the comeback trail - so even if your win/loss
> is
> > good you're making money back slower. But your psychology won't allow
you
> to
> > trade larger.
> >
> > Too many 5-6 months bouncing back, and I might as well buy an Index Fund
> and
> > find a paying job...
> >
> > Since this discussion is primarily for directional oriented traders, all
I
> > can say is this:
> >
> > It takes many many incrementally successful trades (high % won/lost AND
> high
> > amount won/amount lost) to build an account of some size. It only takes
> one
> > extraordinary event to wipe it all out, especially if you're using
> leverage.
> >
> > I like to believe that I do not have the consistency of direction
picking,
> > and therefore like to think that my next trade may be a loser -
regardless
> > of how many accurate calls I may have made in the recent past.
> >
> > For eg, I know that YHOO put in a textbook key reversal bar yesterday. I
> go
> > long YHOO sometime yesterday - for simplicity sake, lets take my entry
at
> > $100.
> >
> > So my stop would be $98, if I want to risk 2% on the trade.
> >
> > Looking at the chart, $98 is pretty good to stop myself out at, it is 2
> > points below the most recent swing low. The last time price traded $98
was
> > 11/15/99, when it broke out on a range expansion bar through $98 on its
> way
> > to the $250 zone. Below 98, there is really nothing to stop it until -
> say -
> > $60, so I'd rather lose the $2 and tell myself I'm wrong - than lose $30
> and
> > double down.
> >
> > Question: It gaps up in my favor at $120. Where do I trail my stop? $120
> is
> > above the highs of the last 3 bars on the daily. So going by the concept
> of
> > higher lows being the new uptrend, I start by trailing it at the lows of
> > each of the bars (113, 115 and 121 - rounded) it busted through before
the
> > open today. Moving averages are out, since YHOO is below both the 50 and
> 200
> > mas in the $130 area and the 20 is below the 50.
> >
> > Lets fire up a 5 minute chart. So far it is a trend day, about to hit a
> > brick wall called the 50 day ma on the daily. Shall I exit? Shall I
stay?
> If
> > I exit, I will be naked without a position if it busts through the
> overhead
> > resistance.
> >
> > Will it? Its overbought - but 4 days ago it was oversold, and it still
> > dropped $30.
> >
> > The distance between my stop and current price is much more than the 2%
I
> > was initially willing to lose when I entered the trade. So should I
widen
> my
> > stop given the additional volatility? Should I narrow the stop given the
> > large range? Should I simply let myself be stopped out at the gap's
lower
> > boundary?
> >
> > How can there be a single answer to this set of events?
> >
> > Next question:
> >
> > Let us say you saw YHOO breaking down from the 50 and 200 ma's on a
range
> > expansion bar on 6/22, You went short the next day at the open ($129),
you
> > set your stop $1 above the prior bar's high ($142) and trail it down
each
> > day using the falling 200/50 mas as your stop out. So far you'd still be
> > short, having enjoyed a $60 round trip. If you used trailing prior bar's
> > high for a stop, you got stopped out prematurely in the congestion after
> the
> > first thrust down and missed the real acceleration down move.
> >
> > Price accelerated in your favor until yesterday. You are an eod trader,
> > looking at eod charts and placing orders accordingly. You see yesterday
> that
> > price may have made a key reversal BUT the next real support is at $60 -
> so
> > you phone in your order to cover if price trades 1 tick above prior
bar's
> > high at 110 instead of the trend following ma at $130. The broker will
> only
> > execute in the day session since the broker does not accept night orders
> > (lets just assume this for the moment).
> >
> > You wake up and are stopped out of your short at $120 - which is $10
worse
> > than your protective stop. Your profit went from $24 to $9. Your risk
grew
> > (typical of trend following methods) as the trade went in your favor.
> >
> > Your reward grew if you overrode your rules and covered at the close
> > yesterday because of the key reversal bar.
> >
> > YHOO too much of a bronco for comfort? Lets take slow and stodgy PFE.
> >
> > Next question: You were also short ARBA because of the same chart
> patterns.
> > Now it opens up $25 tomorrow morning. Boom. Two days in a row, your P&L
> went
> > from x to x minus significant y.
> >
> > Forget the internet stocks.
> >
> > Take stocks of your choice, and post some examples of your questions.
Take
> > some real life cases, put them out here on the list for comments, and
see
> > what you learn. Better yet, why don't you tell us what you would do in
the
> > above examples, or other examples of your choice - given the benefit of
> > history...
> >
> > Without practical application, all this is just so much bandwidth on a
> > charting package's list.
> >
> > Gitanshu
> >
> >
> >
>
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