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Can someone give me money management tips for swing trading? I have around $30000. Should I use 1% stop loss, or trade only 5%, etc...? What about day trading?(not daytrading yet, still have job) I trade US and Canadian stocks. I use mostly technical analysis. Thanks

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Broker/Data: TDA/Interactive Brokers/ Data Feed TDA and Kinetick

Favorite Futures: Stocks NASDAQ

Posts: 813 since May 2011

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From someone that learned the hard way my recommendation hopefully will help you:
1. STOP TRADING REAL MONEY. I would strongly suggest switching to SIM until you have figured out what you are doing money management wise. Yes you can make money in the short run, but the odds are good that you will give it all back and then some if you don't first have your trading system in place. As my mentor always tells me "The punchbowl will always be there tomorrow."
2. USING A SIM (SIMULATION) Account test whatever money management tactics you plan to use with $30,000 SIM money account first. If it works in SIM then try it with real money, but start small and work up.
3. DON'T PAY for a money management system, but do pay for books on the subject. Two books that I like, one that covers just money management and one that has a section on money management are: "A Trader's Money Management System: How to Ensure Profit and Avoid the Risk of Ruin " by Bennett McDowell and "How to Take Money from Wall Street: Learn to Profit in Bull and Bear Markets" by Tony Oz Shop around though and make sure that whatever you buy is in a format suited for you. (I also rarely but a book on trading "new.") [note: Tony Oz's trade size calculator is free, both his and Bennett McDowell's are tied to their personal way of trading and not totally necessary.]

For me I have to use OCO orders for both Stop Loss and Profit Targets as I get wrapped up emotionally in my trades and have found that OCO orders force me to be a bit more disciplined. With both target and stop loss I also have a rule that I can only move them toward price once set.

Hope this helps. I still have a lot to learn on the subject myself.

You have asked a difficult question. The answer comes with position sizing, which is one of most advanced concepts in trading.

If you wish an answer, I would need a few parameters that you did not mention so far. Half of those parameters are linked to your risk appetite, the other half is linked to the system parameters as observed during a backtest or forward test.

Your risk appetite

(1) Risk of ruin: Ruin is defined as the drawdown, at which you would stop to trade your system. Please let me know what is the maximum drawdown, which is acceptable to you. If you lose $ 15,000, would you continue to trade?

(2) Probability of maximum drawdown: Which is the probability, which you would accept for that drawdown?

Would you accept a drawdown of 50% with a probability of 5%? Or do you want to limit your drawdown at 25% with a probability of 2%?

The system parameters

I assume that you have either performed a backtest forward test, or that you have documented your historical trades. The minimum number required for proper statistical evaluation would be a set of 100 trades, which are representative for what you intend to trade. From this set of trades, I would need to know

(3) the expectancy (as a percentage of the amount R put at risk)

(4) the standard deviation calculated from the N percentage gains or losses

When these four parameters (and the starting equity that you have already mentioned) are known, it is possible to determine the position size, which wil give you the total risk, when multiplying with the difference between entry point and stop loss.

For example, if your risk appetite tells you that the drawdown should be less than 25% within a confidence interval of 5%, you can find out the drawdown via a MonteCarlo simulation of your trades, where 95% of the outcomes should produce a smaller drawdown than the maximum acceptable drawdown of 25%.

Converting the 95% confidence interval to 2 standard deviations, allows to calculate the maximum drawdown as a function of the amount R put at risk. R can then be adjusted to match your risk appetite.

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You need to know your trading statistics. If you have non i would recommend trading the sim until you do especially if you cant take losses like a prop firm can where they have larger traders that will over ride your loss.

Once you have your trading statistics

You should know the following (Mostly related to day traders)

1. How much money you make on average per day?
2. How many winning days do you have?
3. How much do you lose on average on your winning day.

Your average losing day should be around your average winning day to become consistently profitable long term. This is how prop traders stay in the game.

Prop Trader Stats
Stats obviously vary among real full time traders but a common stat is:

1. 80% winning days
2. And your average losing day is equal to your average winning day.

Just read One Good Trade by Mike Co-Founder Of SMB Capital. It says the same thing and in my experience it is true.

Once you know your stats

You know how much risk you can take per trade.

Obviously someone who has massive draw downs and bad statisitics has to take less risk to stay in the game.

Someone with good stats can take higher risk.

You might know that you might go through a 20 tick draw down every now and then. So when this happens you might not want to lose more then 20% of your account.

Fk it really depends on you, how much risk you can take before running to the hills crying like a baby. How much pain you can take and still keep a straight logical mind.

I know for sure. Once you know your stats you will know how much risk you can take. Nuff said

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As stated before, this is a very personal subject and there is no single solution that would suite all trading styles, trading personalities, available capital, time frames, etc...
But I will share what I would have personally done with this capital:

1. Trade equities, don't venture into derivatives for now (but you can do forex if you wish).

2. Select stocks from the best blue chips US/CA companies and forget about small and micro caps.

3. Risk 1% of available total capital each time you take a trade, so since you have $30k now, you can risk $300 on your first trade. When your capital reaches $35k you will risk $350 per trade, and inversely if you reach down to a capital of $27k let's say, you will then risk only $270 per trade.

4. This max risk approach will automatically protect you as your account shrinks (by reducing risk$ per trade) and at the same time will allow you to risk more and thus gain more as the account grows.

5. Calculate your position size, i.e. number of shares to buy or sell, by calculating your stop distance from your entry price. For example, if you decide to buy a stock at 95$ and you judge looking at the charts that if the price reaches 92$ it will invalidate your reasons to go long; then your stop will be at 92$ as well and this will give you a distance of $95 - 92$ = $3 of risk. Going back to point (3) above, you can allow yourself to buy 100 shares of this stock because that will give you 100x $3 = $300 loss which is your max risk.

6. Trade large time frames, daily/weekly/monthly and target a reward equal to at least 3x the risk. So in this case, if you risk $300 per trade, you will take swings on the stocks that will give you the potential of gaining at least 3x $300 = $900 or more.

7. Always place a One-Cancel-Other bracket of orders on your position, one order should be the stop and the other one would be the target obviously. Never leave a position without stop and target orders.

8. Never scale in or out of your position, just go full in full out and keep the remaining cash for when you find another opportunity. You don't want to find yourself fully invested in one position, and then have no more cash to put on the other stock you just discovered.

9. Don't take more than 4 positions at a time, and I would suggest you limit yourself to 2 positions. Then as one reaches target and you take off the table, you venture into another trade, and so on...

10. I assume you have a technical analysis approach that is tested and proven with a winning probability of 45% at least. this means, that each time you take a trade, you have 45% chance of being right, and the strategy fails 55% of the time.

If that is the case of your strategy, then you proceed to calculating your expectancy per trade, this is a very important parameter to keep under control.
Let's assume you have a 45% winning probability strategy, this will give you:
1. average loss per trade of -$300
2. average win per trade of +$900
3. expectancy = 45% x $900 - 55% x $300 = $405 - $165 = +$240 per trade

This means that, as you trade your strategy, and most importantly as you take all the signals that your strategy gives you without exceptions, you can expect to make +$240 per trade on average. Of course, concretely, you will still have trades that make you lose -$300 and others that will make you gain +$900.

After 50 trades, you should find your profit around this figure: 50x $240 = $12,000
of course, if your strategy has higher winning probabilities, then you do the calculations accordingly.

Now is perhaps a good time to trade on simulation, very carefully selecting the trades as if you are in real life situations, take a series of 100 to 200 trades so that you can get a first estimate of your winning probability (if you don't already know yours of course). Sometimes we are surprised by the result

Just a side note, the above expectancy and profit calculations assume that you only risk $300 on each and every trade you take. But read again point (3), if you are to risk more as your capital grows, you will also gain more and your expectancy per trade will continuously increase.

Finally, as you are only risking 1% of your capital on each trial or trade, you will be able to remain in the game for quite a long time.
Taking the same parameters of average loss and average gain per trade stated above, you can calculate the minimum winning probability that you require to have an expectancy of ZERO.
1. average loss per trade $300
2. average gain per trade $900
3. expectancy of zero $ per trade (flat account, or breaking even)
4. The calculation will give you winning probability of 25%

So please, if your technical analysis skills do not guarantee you a winning probability of at least 25%, then stick to simulation and work on fine tuning your techniques!
There is absolutely no point of losing your real money doing this...

Also surprise surprise, this is another way of saying, that you don't need super high winning probabilities for a trading system to be profitable. I am sure you have read that many times on the forum already but that's another subject...

Cheers
Fadi

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

Last edited by Fadi; July 25th, 2013 at 05:00 AM.

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