Hi E. Davies; Re The problem is that they *do* return to earth, but not fast enough for my trading account to not suffer margin problems forcing me to cover too early.
The solution is not to have a very well capitalized account. That would only lead to nastier margin calls. The solution is to short fewer shares to begin with.
By the way, someone earlier seemed to be using an interpretation of the 2% rule that is different from the one I understand. The 2% rule says that you only risk 2% of your equity on each individual trade. It does not say that you only allow a position to move 2% against you, or that you can only put 2% of your equity into a position.
If you are long term shorting a stock, and think that it could possibly triple while you are holding it, you would only be able to put 1% of your total account equity into the stock. That way, if it does triple, you will be down 2% of your equity.
If you are long term buying a stock, and think it might go to half its current value in the meantime, you could put as much as 4% of your equity into the stock. That way, if it did halve, you would be down 2% in your account overall.
Money management is one of the easiest things to learn about trading, but one of the hardest to learn to do. Instead, when traders have excessively large positions go against them, they tend to think that their error was one of simply taking on the wrong position, not the more simple one of merely putting too much money at risk.
Best of luck,
-- Carl |
