tireg said:Article's down, but if anyone's ever read Dr. Alexander Elder's Come Into My Trading Room he talks about something along the lines of what you guys are discussing.
It's his 2%/6% rule -- basically, never risk more than 2% of total capital on any given trade - ie: entry price - stop price = risk per share (RPS). Now divide 2% of total capital by RPS to figure in max. entry size.
6% rule means that you should limit your "exposure" to 6% of total porfolio. IE if you were stopped out on all trades, you'd only be down 6% of total portfolio. Combined with 2% rule, this allows a max. initial entry of 3 positions, assuming all of them are maxxed out at 2% risk. Now, as your positions go your way, you have more exposure available, since you'll be raising your stops and hence the exposure to the market becomes less, until it becomes "negative" (profit stops). Very interesting theory, I've been applying the 2% rule quite well... but the 6% exposure can be frustrating at times, esp. when market's hot.