Gorilla and King Portfolio candidates - Moderated Message Board

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Strategies & Market Trends : Gorilla and King Portfolio candidates - Moderated

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To: Apollo who wrote (479)	12/8/2003 7:38:46 PM
From: Mathemagician	Read Replies (1) of 2955

I haven’t formulated an exit strategy, but I am toying with the idea of setting 20% stop loss on all holdings. Opinions on this strategy are most welcome. I have done a good bit of research into exactly this question and I have a few thoughts you might find useful. One is that I have found that the results are better if I let market action dictate the exit, rather than setting a fixed dollar amount or retracement. For example, choose a significant support/resistance level and decide to sell if the market penetrates this level. Another example is to choose a retracement that is not a fixed percentage but is related to the volatility of the market, like 5 ATRs or 20%Beta or something. The other is that you might consider varying the size of your investment so that the same percentage of your investing capital is risked on each trade. This ensures that all the trades are of the same size in an appropriate sense. Here's how to do this: 1. Decide what percentage of your total trading capital you are willing to risk on each trade. (I suggest reading Ralph Vince's Portfolio Management Formulas to learn about Optimal F, the "optimal" fraction of capital to risk on each trade. In practice, Optimal F should serve as a maximum rather than a target. You must be careful to never exceed Optimal F as exceeding it can turn a positive expectation into a losing situation.) Usually, 2% or so of trading capital is appropriate if you intend to carry about 10 positions. 2. Calculate the dollar amount that this percentage represents. 3. Figure out where your entry and stop loss will be. Calculate the number of dollars per share that you are willing to lose. 4. Divide the dollar amount to be risked (from step 2) by the number of points to be risked (from step 3). This will give you the number of shares. Example: Step 1. Trading capital=$100,000 Percent risked per trade=2% Step 2. Dollars risked per trade=$100,0002%=$2,000 Step 3. Suppose Entry=50.00 and Exit=40.00 Dollars per share risked=50.00-40.00=10.00 Step 4. Number of Shares=Dollars risked per trade/Dollars per share risked=$2,000/10.00=200 shares. This method allows you to maintain a constant level of risk and should help reduce the volatility in your portfolio. Obviously anyone considering implementing this method should be sure that they completely understand its strengths and weaknesses first. <font face=wingdings>e</font>

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