Position size

[Morris]

I posted this on the Fool but would be interested in views here:

Been doing a lot of thinking about the last few weeks of trading. One thing I have been doing this week is moving my stops as the price moves in my favour.
I enter the trade, then immediately enter a stop order (good till cancelled) and wait.

If the price moves in my favour, I adjust my stop - usually as soon as possible I enter a stop at the price I paid, thereby eliminating risk from the position. Thereafter I enter new stops to protect my paper profits.

This worked pretty well last week. Only five trades but all profitable.

Now here's the tricky bit. Normally I choose a postion size based on a sort of amount I'm happy with (currently approx £10k). Now I have done some study (including re-reading Elder on money management) and I think I should actually be choosing my postion size based on my max. acceptable risk.

Eg if this max is £500 on any postion, I calculate the max. postion based on my initial stop loss (allowing a small extra for slippage).

Have put together a spreadsheet to calculate position sizes based of this strategy.

An example - I went long on RTK @ 465 yesterday, initial stop was 449. this means my max. risk with a 2500 share trade was £400 before any slippage. So my spreadsheet gives me a max. postion size of 2777 shares.

Anyone use this sort of strategy, or have any views.

(All trades are CFDs by the way).

Gawd that was a long post...

 

[darth trader]

CFD's and spreadbetting certainly make you think about the maximum risk you can take.

Another way of thinking about/saying the same thing is risk/reward ratio and scaling your stake to suit your pocket based on the stop loss.

I usually do this in my head but a spreadsheet is a bit more organised.

 

[troyresearch]

Assembled thoughts...

Interesting one. I know some will think it's sacrilege for me to even mention it, but until recently I've seldom had a system of sell stops in place. Let me expand on this before a stream of 'told you so' postings come back my way.

For UK markets this has laregly been as a result of using [possibly the wrong sort of] execution only online brokers, namely ones which don't have the facility to enter limit orders, other than on a fill or kill basis.

While this isn't too much of a problem if you're actively monitoring prices during market opening hours (and, just as importantly, able to act on this information), I suspect most of us have other things to attend to (eg work) so this may not be practical.

OK so lesson 1 I learned was to choose another EO broker...

For US markets, where brokers are generally, how shall I put it... more enlightened (?!) I have the option to enter automated stops, although not to the extent of these being trailing.

For what it's worth the last few months I've split my holdings there (both longs and shorts) into two categories - those on which I impose a rigid percentage-based system of stops and those which I allow to run their course. The unsurprising news is that there have been successes and failures in equal measure.

However, an interesting piece of anecdotal evidence is that where I have imposed no stops, I've picked up greater gains, while losses on shorts have generally turned around within a max 4 week period. Ok so maybe says something about my over-cautious or over-involved trading style and I certainly wouldn't recommend this to others. But, in conclusion I'd say that the temptation is to liquidate a loss immediately and move on to the next one. Patience, I've found doesn't necessarily pay dividends, but it certainly puts more money in the bank.


Rgds

Troy

 

[Morris]

Stops

Hello Troy,

Maybe I should have added that I monitor my CFD positions for as long as they remain open (learnt an expensive lesson prior to this rule). I will often close the same day. Last week 3 trades were day trades, remaining 2 were 2 and 3 days.

In his book 'The Way to Trade' John Piper identified three stages which a trader has to ge through:

1. Greed oriented. (We've all been there)
2. Fear oriented (I've been there, I'm sure others here have.)
3. Risk orientated.

I think my earlier post would suggest I have reached the third stage.

Living & learning,

Mo.