1% Capital Risk - But I'm Already into Margin?

[TheBramble]

If I limit my risk in any one trade (single directional or pair) to a small percentage of my total trading capital - it's quite possible to end up with a position size which ties-up all my cash and quite a bit of my margin.

True or False?

For instance:-

1. I'm taking a single long directional trade (for ease of example) for which I have a stop-loss of 10c.

2. My trading capital is $50,000.

3. I risk a maximum 1% ($500) per trade.

4. I therefore calculate I will buy 5000 shares (regardless of share price ) i.e 5000 X 10c = $500 (max possible loss).

Here is the position size in capital and margin requirement depending upon the share price, based on a position size of 5000 shares.

Share Price - Position Value
$10 - $50,000 (my total capital cash holding)
$15 - $75,000 (150% of my cash and 37.5% of my margin)
$20 - $100,000 (twice my cash holding and half my margin)

You get the picture.

Is there some other factor you use when deciding on your position size apart from stop-loss?

Or do you find you (a) normally can only trade one position at a time or (b) use some other function of your total trading capital to cap the position size to other than total risk?

 

[Grey1]

Please look at my reply to your other post.. If by Tuesday after noon you still have any problems , then I will be in the room on wednesday to elaborate on these two issues. ( I will be away on Tuesday )


Quote " I risk a maximum 1% ($500) per trade. "

No you donot. Not after Tuesday .. 1% rule is a general guidline...



regards

 

[triplepack]

Hi Tony ,
Grey went thro this on Friday and quite straightforward.
If u have 50k of cash u have x 4 daytrading margin= 200k

So if you then for example, divide ur cash by say 4 you can diversify into 4 posns of 12.5k each .on margin 50k.
You then would select a stock of say $30 , divide 50k by $30 , this will give u 1666.6 (say 1500) for ur posn.
You can then go and trade 3 others or invest in other instruments.
I think 5000 shares of a $30 stock ,at our stage is a bit too much to get in and out of easily.

Grey then gave us another formula to use to derive a stop loss
dependant upon a volatility multiplier and the spread at the time of taking the posn. (I've left this at the ofice sri)

Hope ive got it right Grey(lol).

Cheers
Richard