Hi Tai Jin; Great comment on risk management! A good proportion of the traders I have seen crash and burn had the incredibly bad habit of increasing their share size after a loss. Since traders tend to trade in streaks, it is better to decrease share size after losses, and increase share size after gains...
There is a great book written solely with the purpose of helping traders decide how big of a position to put on. I have it, and it opened my eyes in several ways:
The Mathematics of Money Management: Risk Analysis Techniques for Traders
by Ralph Vince
shop.barnesandnoble.com
It is $48.96 at www.bn.com, from the above link.
The figure of merit is how much of your equity is at risk for each consecutive trade. The book suggests that 1% is a reasonable figure. This applies to the amount at risk, not the gross amount of the trade. For instance, if you could reasonably expect to scalp a reasonably liquid stock without ever having a loss worse than $3/4 per share, then in order to trade 1000 shares, you would need to have $0.75 * 1000/0.01 = $75,000 in your account.
Of course, someone who holds positions overnight has no way of holding their losses to under a buck.
Every now and then, the market turns out to have much more risk than is apparent. As far as risk goes, the worst thing that can happen to a trader is a trading halt. I remember last fall when CIEN and ???? cancelled their merger agreement. They halted both stocks midday, and then opened them up a couple dozen sticks up or down from their previous prices. (Yikes!)
One thing that always will completely destroy a trader is to catch the gambling bug. I have been fortunately able to avoid it except for a few very brief (i.e. hour long) periods, but those periods were enough to teach me that I was not immune... (I played AMZN at a time when I was nowhere near capable of trading 100 shares of that nasty thing. It has calmed down significantly, of late.)
-- Carl |
