You should be commended for wanting to limit your risk to 1%. It is obvious you are trying to be careful to stay in the game if you start taking on a string of losses.
Might I recommend, however, a different approach to achieving the same risk controls?
Instead of saying "if the stock goes down 1% I'm out" you might want to pick a price level, like somewhere you think that price has support/resistance. Then determine how far the stock has to move to get to that "get out" position. Then SIZE your position such that if that level is reached then you take a 1% loss in your account.
For example, let's say stock ABC is 95.00 and you want to go long, but you see support at 90.00 and if it gets below that level you for sure need to get out of the stock. So your risk is $5 per share (95-90). Then let's say you have a $10,000 account. Then you take that $5 risk and determine how many shares to buy such that the $5 risk = 1% of your account.
1% risk = 0.01 * 10,000 = $100
$100 risk / $5 risk/share = 20 shares
So you would buy 20 shares at $95, so your cash outlay for this trade is $1,800. with a stop loss at $90. So you've sized you account such that your risk is 1% of your account and the risk level is based on the way you are reading the market, not some arbitrary percent-of-price number.
If the stock starts to move in your favor you can move, or "trail" your stop higher to keep that $5 from the highest high in the trade so far. If the stock gets to $100, now your stop is at $95 so the worse thing that can happen is you break even. At that point you have a stock with momentum working in your favor, so maybe you add to your position at that point, 20 more shares @ 100, stop at 95. You now have a position twice as large and at worse you just lose 1%, just like at the beginning of the trade.
The good news is that you still have $8200 of cash in your account to use for other trades. If you take care to not pick other instruments that are too correlated, pick some longs and shorts, you can put together a nice little diversified and hedged swing trading portfolio.
Last edited by shodson; August 19th, 2014 at 01:10 PM.
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BTW, I like Carrerra's too. Attached is a picture of me and my dad's 1976 911S, Targa top. He's had the car for over 30 years and has most of the stock parts and interior, besides the stereo. It was in disrepair for a few years because my dad couldn't drive it anymore (Parkinsons disease, DMV took his license) and it just sat and rot in his garage. He never let anybody else drive it so we never bothered to think how bad it was to just let it sit there and deteriorate. But once he became incapacitated we put it in the shop, got it refurbished, and got it running again. My sister has it now, but I drove it this winter for a few months and would take my dad out in it for drives every now and then, with the top off, turn up his favorite jazz station, and take him on drives down PCH to try and help him feel "normal" again.
Last edited by shodson; August 19th, 2014 at 01:29 PM.
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Thanks, I like your approach to risk control by sizing the position to match.
BUT, at this point in the game I simply don't have enough money available for trading to really be able to make
good use of that strategy. Between my two accounts I've got only about 10K to play with, and about 80 percent
of that is in my IRA account's brokerage, so unless I want to pay penalties, any money I make in that account
has to STAY in that account. My objective is simply to grow that account faster than if I had left it in a mutual fund,
and maybe I'll be able to do that.
But the smaller account is REALLY small, only about 2000 dollars, and with an account that small I can't really afford
to do anything with it BUT put it all into play on any given trade. In this brokerage, a few trades from now I run out of discounted commissions and it will then cost me 20 dollars to buy and sell, which is a full 1 percent at 2000 dollars.
Splitting that account to make two trades will at that point mean it will cost me 40 dollars just to trade.
So until I make that account larger, whether by depositing to it or transferring from another account, I don't feel that
I have the option of sizing my trades based on potential losses as you described.
I think I will be able to start doing that when and if I can get the account above 10,000 dollars, which may take a while.
Particularly when it appears that I have changed my strategy from day trading to swing trading, at least for now.
I'm not thinking in terms of "gotta get out by 4 PM" anymore.
It's called fixed fractional sizing, and doesn't require any more trades than normal to execute. It is very simple:
- define your risk as a percentage of your capital. For example, 3%. Convert that to dollars (3% of $2000 is $90)
- subtract an average commission to get in and out, say $5 per side. Total risk is now $80.
- using a price-based stop, determine how far the stock will go against you before you exit the trade (for example, maybe it's $0.50 for a stock)
- Determine how many shares you can purchase by dividing total risk $80 by $0.50, and you arrive at 160 shares. That is your size.
It is a way to size such that you are consistent with how much of your capital you risk. Just making sure you're aware that it has nothing to do with scaling in or out of a trade, it's simply a way to size your position, and uses the equivalent commissions and fees that any trade does.
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Today my automatic execution at 4.08 for IAG kicked in and netted me about 2.7 percent profit after expenses.
I'll take that profit percentage every time!
It happened while I was out taking care of some business in town so I was not nursing the computer at the moment.
The absolute peak for it today was 4.10 and I DID say that I think it would hit 4.10 but I opted for a more conservative
target simply because I'm rather conservative. It only spent about 3 minutes at or above 4.08 today so the window
of opportunity for making more than 4.08 was VERY brief and there is no guarantee that my brokerage could have
executed the trade at 4.10 before the opportunity was gone.
SEAS spent most of the day above my buy price of 18.89, which I was happy to see. Barring any unfortunate news, I think that the long climb up toward my target price has begun.
But there WAS news. Some ambulance chasers have announced that they want to investigate the company for possible violations of certain securities laws. The reason: They want to go after SeaWorld to recoup lost stock value on behalf of their investors who held the stock prior to the date of the crash. Which is absurd, as the nature of the stock market is that prices will rise, and prices will fall, and that's just how the game works. If you aren't satisfied with that, stay home and play video games. But these clowns see it as just another way to legally steal money from a company.
Other news: SeaWorld has announced that it will be making changes to the killer whale tanks at its parks, by making
them larger. (And probably other upgrades as well.)
And some animal rights whacktivists are after the company. No doubt it's the same sort of whacktivist that is opposed
to the keeping of dogs and cats as pets.
I don't think any of this is going to significantly affect the recovery of the stock price.
If I'm wrong, my stop will kick in and that'll be that.
Last edited by Carrerain4; August 20th, 2014 at 06:37 PM.