DAYTRADING/SWINGTRADING STOCKS with INTRADAY INVESTMENTS Message Board

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Strategies & Market Trends : DAYTRADING/SWINGTRADING STOCKS with INTRADAY INVESTMENTS

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To: - who started this subject	6/5/2001 9:34:15 PM
From: deronw	of 565

The importance of adjusting position size based on volatility of the stock One important factor in having sound money management is to always adjust one's position size of a stock based on the volatility (primarily the average daily range) of each particular stock. Although this concept may sound simple, it is a practice that is sometimes overlooked, even by more experienced traders. By trading larger share sizes of the low-beta stocks and smaller position sizes of the high-beta stocks, one is able to more effectively control risk without requiring any additional efforts in managing the trade. Let me give an example of this concept. . . Coming into the open today, we were long 4000 shares of RMBS and short 1000 shares of JNPR. The reason we did this is the difference in price of the stocks, as well as the volatility of each of those two stocks. In terms of percentages, a $2.30 move in JNPR is approximately equal to a 5% move in the stock. However, it only takes about a 50 cent move in RMBS to make that same 5% move. Therefore, even though we lost almost 2 points on our JNPR short this morning and only made an average profit of 0.89 points of profit on our RMBS long, we still were net positive between those two trades. This is because we adjusted our position size based on the volatility of the stock. However, if we would have had equal number of shares in both stocks, we would have ended up taking an overall loss on the two trades. By being aware of the volatility of each stock you trade, and making adjustments to your share sizes as a result, you will dramatically decrease your risk in the high-beta stocks and help to smooth your equity curve. Deron

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