Dear Webb,
Richard beat me to the punch, as I was going to suggest his 10-10-1 system (10 even amounts, 10% max loss on each amount, total max loss to equity 1%).
Another method is to vary your trade size according to your stops. I use chart based stops at the entry of a trade. This means, if I buy a stock, I first find at which point on the chart I would consider the trade a failure and sell my position. It is usually based on a support level (price or MA). I then see what the stock is trading for, and make some choices.
For example....If I have $10,000 equity, and I want to buy a stock that is trading at 11.00 with a support level of 10.00, I have to make a decision. I have to decide how much I am comforatble risking, so let's say it is 5%. If I buy the shares at 11.00, I am risking roughly 9% to my support level (which then may not hold). That is too much risk for me, so I have two choices. I can wait and see if the stock pulls back closer to my support level (without violating the integrity of the original "long" trade), or I can buy fewer shares.
If I only want to risk 5% of the $10,000 ($500.00), then I can only buy 500 shares. That way, a drop of 1 point, to my support level, will only cut my equity down 5%.
It all comes down to what you are comfortable with. How much of a drawdown can you handle, how much of your trading capital is disposable, how much you are willing to risk on a percentage basis, etc......
BCL |
