well Autumn,
unfortunately, stop loss orders are not money management
money management has to do with how much money you can afford to loose on a single trade, and still be around to fight another day.
TT can undoubtedly give you better formulas than I, but here goes:
Based on what Elder and Sperandeo have to say on the subject, the general idea is not to have "at risk" more than 2% of your total capital on any given trade. The other main idea is not to tie up more than x% of your capital in any one trade.
so lets say that you tade 1000 shares of xyz and you actually place a 2 point stop loss. therefore, under normal circumstances, you have $2,000 at risk (the difference between your entry and your stop). This would imply that you have capital of $100,000. If you wanted a wider stop, then you would have to trade fewer than 1000 shares in order not to exceed the 2% limit.
However, as you noted with OXHP, you could have lost $35k or whatever under that abnormal situation if you had traded 1000 shares. Well, that is the result of having too many of your chickens (if you pardon the expression) in one basket. I forget what the actual % drop in OXHP was, but let's say it was 50%.
That would mean that your total investment in OXHP was, hypothetically, $70,000 (2 * $35k). Well, that $70k would have been 70% of your trading capital (using the $100k example), hence the potential for catastrophe. I have not found a precise formula for how much of your capital to put in one basket, but I seldom go over 20% myself, and feel much better around 10%
So looking at OXHP, the most you would have wanted to put in the trade might have been $20k, which would have been only 300 shares @ $70. On the other hand, you could have if you wished, used a wider stop, since even $4 would have only been $1200 on the 300 shrares.
As it turned out, the $35k loss would have cost you 1/2 your trade, but only 10% of your capital. A blow, but not nearly the same as if you had put 70% or your capital into the same trade and lost half of that.
Well anyway, that it what I mean by money management, and I think you will feel better if you figure out some rules for yourself, above and beyond the stop loss. It is when I am careless about my own rules that I get in trouble. In fact, each trade has to be evaluated on a money management basis.
now, I have never lived near a pig farm, but from what I hear, well..., maybe I did okay with the chickens <g>
Bob |
