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Which topic about Portfolio management
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Which topic about Portfolio management

  #1 (permalink)
Elite Member
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Which topic about Portfolio management

Hello all,

I am interesting with some topic talking about the portfolio management, as I don't know how much money I should bet in one trade, how to add another bet into the securities, the ratio...and so on and so on.

I found most of the topic related to programming and indicator, any keyword recommended to search for related topic?

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  #3 (permalink)
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Risk Management


I think you would be better off to look into Risk Management rather than Portfolio Management.

Looking into the mentioned topics is a good start. Sadly risk management is one of the least covered topics in trading, even as it is one of the most important parts of trading.

Most Risk Management books have a very academic approach and focus on a huge portfolio you usually find at Institutions. I will recommend you scan through trading books and look for ones that has a chapter that cover risk management.

Hopefully somebody can point you to better resources.

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Well, as is the case in virtually everything in life, you will find many and different opinions on the subject

But I can share what I personally do; and it could perhaps help you or at least put you on a track to continue you research and studies on your own until you find what works best for you. Risk of ruin, Theory of ruins, or Kelly criterion are all valid standards that you should look at and study as suggested by other members above.


I personally approach this business with a set of rigid non-flexible rules that luckily until now never failed me and protected me while growing my capital and fund:
1. Never risk more than 1% of total capital on any trade, this shall be the maximum amount you can lose per trade
2. Never play more than 10% of total capital on any single trade, this shall be the maximum amount you invest in a single instrument, stock, option, future, bond, or whatever...
3. Never exceed 60% of total capital invested at any given time

The above points do not mean that I always risk 1% of total capital, or that any trade I take is sized 10% of my total capital. They are max limits, and depending on the situation, instrument, risk and volatility I could decide to open a position with only 5% of total capital, or 2.5%; and sometimes less on small caps and pure speculative plays for instance. Similarly, it doesn't mean that I always have 60% of my capital invested in the market at any given time

These numbers and figures turned out to be what works best for me, but hey they are absolutely not the only way of managing risk or approaching risk management. You shall try and experiment for yourself, and watch/read what other traders and fund managers do with their wealth too.

The capital that I consider available and on which I apply these percentages is the total secured amount of my trading account at the time of taking the trade.


Let me give some examples to illustrate my model:

Sitting 100% in cash, let's say on a $25,000 account, obviously 10% would mean $2,500 and this is the amount of money I would drop to let's say buy some shares of AAPL.
Assuming that I bought some AAPL shares as per the above example, I will then of course place a stop order that would take me out of the market if I lose 1% of total account or $250.

The situation then would be:
- $22,500 cash
- $2,500 in AAPL and stop out order for -$250 max

Now, if I find another good opportunity on MCD and decides to invest into that, I will take max 10% of total secured capital which is $22,500 cash + $2,500 - $250 = $24,750.
So I will play $2,475 on MCD, and the portfolio would become:
- $20,025 cash
- $2,500 AAPL with a stop out order for -$250 max
- $2,475 MCD with a stop out order for -$247.50 max

Note that as the trades progress, you will move your stop orders to break even, or in-the-money and this will improve your capital availability for the next trade.
Similarly, as you close a trade, your cash portion of the portfolio would increase and that also alters your position sizing.

Now let's say the AAPL trade is working real good, and I advance my stop order to an in-the-money that secures me a +$125 on that trade, while the MCD is not convincing anymore, and I decide to tighten the stop to -$75 on it.
The situation would become:
- $20,025 cash
- $2,500 AAPL with a stop out order for +$125
- $2,475 MCD with a stop out order for -75$

And total secured cash increases to: $20,025 + $2,500 + $125 + $2,475 -$75 = $25,050

Finally, I notice that the Chinese small caps are running these days, and I decide to take a small position in XIN.
This stock as per my interpretation is a non stable and high risk stock, so I won't drop 10% of total capital on it, but just 2.5% or $626.25.

The portfolio one more time becomes:
- $19,398.75 cash
- $2,500 AAPL with a stop out order for +$125
- $2,475 MCD with a stop out order for -$75
- $626.75 XIN with a stop out order for -$250.50 max


Another point though, I always place my stops and target orders on support and resistance lines, just below or just above for a stop, and the inverse for the targets. Sometimes, the the distance of the stop from entry price is big and I would alter my position size to fit my criteria of not losing more than 1% of total capital on the trade.

For example, I would like to buy a stock ABC at a price of 30$ per share, but my analysis point me to a logical stop out price of 26$. This means that I can lose 4$ per share, and given the $250.50 limit following the above sequence of examples, I can only buy 62 shares and thus the position would be 62 x 30$ = $1860

In that case, the portfolio then would shape into:
- $17,538.75 cash
- $2,500 AAPL with a stop out order for +$125
- $2,475 MCD with a stop out order for -$75
- $626.75 XIN with a stop out order for -$250.50 max
- $1860 ABC with a stop out order for -$248 max

Another case, where the stop out price is so close to your entry price that to abide by the max risk of 1% of total capital you could reach a position size of let's say $5,000. But in that case, the limiting factor is the 10% of total capital, and I would buy shares worth $2,500 only and take advantage of the fact that my calculated stop above would make me lose only $125.


I will not really discuss trading skills and techniques as in when to enter, where to place the stop and targets as this is not relevant to money management skills in a direct way; but I would like to touch base on how I usually manage the trade itself from a money management point of view:
- I try as much as possible to trade an even number of shares, like 10, 16, 400, 250, etc... but this is not really critical
- However, I Place an initial stop order for the total quantity, let's say 10 shares; and then a first target on 5 shares and a second target on the remaining 5 shares
- Upon reaching the first target I close the trade on 5 shares and move the stop order to break even on the remaining 5 shares
- The stop or the second target would complete the closure of the trade

This gives me the opportunity to play an easier target first and secure some gain on a first half, then wait for the second more ambitious target on the other half.
At the same time, it liberates half the position as it places it back in cash with some gains, and thus available for future trades -> very useful when a trade is taking too much time to achieve target and I find a better opportunity in the meantime.

Either way, as I said before, this is just an idea to guide you in your own research and analysis.
The best would be for you to build the best system that suites also your trading strategies, skills and stock/commodities scanning, time frames, cash on hand, and so on...

Good luck and happy trading

Cheers
Fadi

Successful people will do what unsuccessful people won't or can't do!

Last edited by Fadi; October 26th, 2012 at 11:13 AM.
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