Hi KZNerd; I'd be careful what you post here. A lot of people have lost a lot of money, and they are probably not in the best of humors...
Which reminds me about trading, and what almost inevitably happens to amateur stock traders.
There is a great book titled "The Mathematics of Money Management," that mathematically derives the percentage of equity that a trader (or investor) should risk on any one trade. It works out to something under 2 or 3 percent, and this figure is consistent with the limitations that the big trading companies (like Goldman Sachs) place on their traders.
It all goes back to gambling theory. If you have a gambling game where the odds are in your favor (though that is a highly debatable proposition for most amateurs), then if you want to make money from it, you must determine how large to make your bets. If you bet all your money on every play, you will eventually lose all your money, and will be out of the game. If you ben none of your money, then you will be too safe, and you won't make any profit. So traders (who do not believe themselves to be Godlike), and who want to conserve their capital (i.e. they don't have an income stream available to replace it), have to limit their bet size.
The 2% limit works like this. If you have an account with $100,000 in it, you can only afford to lose about $2,000 per trade. If RMBS, for instance, is capable of dropping by $8 over night, then the maximum number of shares you can hold over night would be $2000/$8 = 250.
If you are trading RMBS during the day, and the maximum it can get away from you might be $1, then you could trade up to $2000/$1 = 2000 shares. In either case, you would have to have stop losses in place, and watch the market like a hawk, so your actual loss doesn't exceed your stop loss. In addition, especially for overnight trades, you would have to give yourself a little leeway. The same calculations (or worse ones) would apply to those shorting the stock.
So happy and safe investing, everyone! Remember that you are not God-like in your ability to predict either the future of technology or the future of a stock price!
-- Carl |
