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Hi Richard,
Good brief! Allow me a couple of remarks:
1. As I only trade with our own money - and with money that I can afford to
lose if the worst comes to the worst, I take a considerably higher risk per
trade than you propose, i.e. 4% per trade. You as a professional trader
have of course to stick to a considerably lower percentage.
2. Risk of ruin @ 4%: If we assume a realistic loss of 6% because of
brokerage and slippage, this means that trading capital is halved after the
11th. consecutive bad trade. Insofar as FUD generally reaches menacing
levels after the 7th bad trade in a row I consider this as an acceptable
worst case scenario.
3. On the other hand, as seven bad trades can (and do) easily happen to any
trading system I cannot emphasize enough that everybody should consider if
he or she can live with a nn% meltdown of capital. Have a look at this table:
Loss/Trade 1% 2% 3% 4% 5% 6% ... 10%
Remaing Cap 93% 86% 80% 75% 69% 64% ... 47%
4. As you correctly note there is a multitude of ways to find a stop.
Therefore I propose a slightly different order of proceeding:
A. Find your stock and entry level
B. Determine the stop level by whatever method you prefer: ATR,
Hist. Vola, Channels etc
If that's too complicated a simple maximum percentage drop
will do handily as well, eg 4% for defensive stocks
C. Now you know your (theoretical) maximum loss per share
D. Add between 2% and 5% for brokerage & slippage
E. Compute the number of shares to buy as delineated by Richard.
5. Never forget that the best plans of mice and men can be upset by one of
the all too common market desasters; eg. Bayer which last week lost over
20% in less than 30 minutes thereby raising traders' cholesterine levels to
new peaks.
Happy Trading,Jan Willem Roberts
PS Re. worst case scenario, here the unforgotten Robert Heinlein has a gem
of advice for all of us:
"When in trouble or in doubt, run in circles, scream and shout!"
At 19:04 13.08.01 +0800, you wrote:
>I'll summarise what I've gained out of Van Tharp's book.
>
>Trading float = Cash + Realisable value of current shares
>Risk per trade = a percentage of Trading Float (eg 1.5%)
>Stop Loss = 2 ATRs
>Position Size (in # of shares) = Risk / Stop Loss
>Don't let position size * share price exceed 20% of your trading float
>(capital conservation)
>
>eg. $40K float
>1.5% risked = $600 risked in the trade (ie how much you will lose if the
>trade goes against you).
>Assume $30 stock called ABCD, with an ATR of $1.30
>Stop = 2 ATRs = $2.60 (ie you sell when the stock is $30 - $2.60 =
>$27.40)
>Position size = $600 / $2.60 = 230 shares
>Consideration = x $30 = $6900 (ie passes the rule of a consideration
>less than 20% of our float).
>
>ie buy 230 shares of ABCD, stop loss is set at $27.40
>
>Advantages:
>1. You buy less of the stock when the volatility increases (as measured
>by the ATR)
>2. You always know the exact amount you're risking on a per trade basis.
>You'll find it near impossible to lose all your money if you only risk
>2% on any given trade due to the rule #4.
>3. We allocate < 20% of our money on a per stock basis, to guard against
>bad things happening (like a stock losing 60% of its value in one day -
>happens occasionally!)
>4. As our float increases, so do our position sizes. The opposite
>happens when our capital decreases.
>
>Other things to watch:
>1. Slippage (you can't always get out at your stop loss level).
>2. Trailing profit stop - set these at your preferred levels
>3. ATRs aren't always the most suitable stop loss mechanism. Some may
>prefer to use a stop just below recent support levels instead.
>4. On low capital levels, brokerage comes into play.
>
>Comments?
>
>RICHARD DALE
>IT PROJECTS MANAGER
>daytraderHQ Ltd
>Level 4, 66 Kings Park Rd
>West Perth
>Western Australia 6005
>Phone: +61 8 9226 0767 Fax (08) +61 8 9322 9998
>Email: rad@xxxxxxxxxxxxxxx
>Web site: www.daytraderHQ.com
>YOU'LL NEVER TRADE ALONE
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