Our return goals are higher than those set by Mr. Hite, as such we must be willing to take a bit more risk per trade then he does. Remember the principle however that one trade should not matter.
The risk control module we recommend for the techniques you will learn here is 2%. You could go up as high as 3%, but the swings in your account, and thus potentially your state of mind, will be large. We prefer to risk a bit less and pay the shrinks a lot less.
What does this 2% risk module mean?
We will use an example of a $50,000 Swing Trading accounts for the purposes of illustration. You find an opportunity in XYZ as a short if it trades below 55 1/8, and your stop according the methods you use should be 56 5/8. This means your risk per share is $1.50. At this point you must determine how much your risk you can risk according to your risk control plan. In this case you will be risking $1000, which means if you are wrong and are stopped out, you will lose $1000. Risking $1000 you can trade up to 666 shares of xyz as a swingtrade. In this case we would advise rounding down to at least 650, and probably 600 just for ease of executions sake. However, if you want to be absolute on your risks, which isn't a bad plan, you can trade 666 shares. Just remember to never round up. If you do any rounding, make it down as this will not put you in the uncomfortable position of risking too much of your capital on one trade.
Using this risk module each time you make or lose money the absolute dollar amount risked will of course change, but it is important once you have a percentage you are comfortable with to stick with it.
As an example, say the XYZ trade doesn't work out and you take your stop, your account now has $49,000 in it. On your next trade you wish to buy ABDC at a price of 21 3/4 with a stop of 20 7/8. You can risk $980 on this trade. Each share of ABCD has a risk of $0.875. This means that as a Swing Trade, using a 2% risk module you can take up to 1120 shares. We will assume this trade works out and you sell 3 days latter at a price of 23 1/2 for a gain of 1 3/4 per share, we are also assuming that this is the only trade you've made during this time frame for the sake of simplicity. Assuming you took a position of 1100 shares this brings your account up to $50,750. The next trade is in VVV, it is a buy at 45 1/8 and your stop is a rather wide one at 42 1/4. This puts your risk at $2.875 per share. With $50,750 in your account you will be risking $1015. As such you can take a position of 350 shares. Two days latter when you sell VVV at 50. This brings your account up to $52,456.25, which means that you will be risking $1049 on the next trade. As you can see, after three trades using this module your account is up a very respectable 4.9125%. If this represented one months worth of trading, you would be on track
to return at least 58.9%, a number most fund managers would sacrifice their first born to achieve.
What would happen if we used an arbitrary number of shares in each position, say 300 shares per trade as many swing traders do. You would vastly under perform, after these three trades you would have an account size of $51,537.5 for a return of 3.075%, which is very respectable, but not as good as you should have done. The real risk however with this arbitrary system is that it is quite possible you will find yourself in a position of risking entirely too much money on one trade. Say you want to Swing Trade something like Amazon.com. Stocks such as Amazon very commonly have stops of $10 or more. In this case you could be risking $3000 on one trade with an account of $50,000. This is a 6% risk, which is entirely too large a position to consider taking. It is this kind of position that will put you out of business and keep the psychiatrists in business.
Brandon
www.mtrader.com/swingtrade |
