Givens: Your cash balance is $4,000 Your $4,000 dollar trading account(Portfolio) risk is 2%($80.00) If your trading plan calls for a risk/reward ratio of 1:3, (minimum recommended for trend following) And your idea is breaking through, or reversing, off a support/resistance line. You want the distance between your entry price, and the stop set on other side of Support/Resistance, to be within the predetermined risk portion of the risk/reward ratio. Examples: 1. If your predetermined risk portion of the risk/reward ratio is .50 cents, then you would not take the trade unless you see a potential 1.5 dollar move from your entry price to the next Support/Resistance line, or level. 2. If your risk is .25 cents, then you would not take the trade unless you see a potential .75 cent move to the next Support/Resistance line. An .80 cent, or smaller, stop will allow you to work with at least a 100 shares Jeffrey
Voodoo there are quite a Few different ways of determining your risk with stops, but to have a constant 2% of price is very limiting. Sometimes it's better to use support and resistance. Other times a closing price, opening price, a fib #, a round #, a moving average. there are so many. Your risk though that you can lose on a trade is your entry price minus your stop multiplied by # of shares. ALL 3 can be changed to control risk. The trade who is talking about 2% is talking about his account value. He might change the share size, his entry price, or his stop to keep his risk in check. rtharp
Don't think about stops in terms of share size then dollar amounts and percents. As stated in another post, let the chart determine an appropriate stop loss, then determine how much of your portfolio you want to risk on this trade (percent or fixed), then from there determine share size. In that way, the looser the stop loss the fewer shares and the tighter the stop loss the more shares. Of course, you should always consider the potential profit in relation to the potential risk. Consider reading (if you haven't already) the sections of "The Market Makers Edge" by Josh Lukeman that deal with position size management.
Hello Alex, you're certainly right when you want to apply strict risk-control in your trading. As you haven't provided other information about your trading plan, I'd just want to say, that the money-management part of your plan must be coherent with the tradingstyle, the system you're gonna use and the underlyings trading characteristics. This means also, you have to take the stocks volatility into account when determining your stop-loss level. I.e. it doesn't make much sense to trade highly volatile stocks with a 2% stop-loss, unless you are a genius in picking the correct tops and bottoms, because you'll get stopped out so many times, that even with IB's low commission plan you'll loose the game. I think, especially with regard to the small account size, that you should try to take only trades which offer you a very high probability of success and a high expectany of becoming profitable with a high RR ratio. Of course, there's no guarantee in the markets, but a few proven standard rules are still applicable, even in todays markets. As others stated already, let the charts tell you what to do. If I'd be in your shoes, I'd look for a system which generates low-risk entry signals and thereby allowing you to apply your tight stop-loss rules without running the risk to get stopped out so many times before a proftable trade occurs. My suggestion would be, to use a simple approach like trendfollowing rather than trying to pick S&R reversal points in sideways markets or trading a breakout / breakdown system which inevitably increases your risk due to rise in volatility : Find strong uptrends and buy the dips ( yes, there are still some stocks which made triple digit gains in uptrends through 2001 ) Find strong downtrends ( that's an easy one today ) and sell the recoveries. It does not need much risk to determine, whether the trend resumes it's major direction after a brief reversal. To determine the major trend and key reversal points, applying a multi-timeframe strategy helps very much. As for daytrading, look at the daily or 60 minute charts first to determine the current trend. Apply a trendline ( highs in downtrends , lows in uptrends ) or a 13 - 17 period EMA and look for price-reversals on the 3 - 5 minute chart when the price approaches the trendline or the EMA price-zones. If you have a strong trend ( up or down, i.e. measured by applying an ADX indicator, ADX > 30 ) chances are high, that the major trend will prevail at the end of the day and you can apply fairly tight stops to find out. Ideally, the trend would be coupled with low volatility. Avoid stocks with wild price swings - the risk of being stopped out with a tight stop of 2% is simply to high for a small account. In order to enhance this system, you could select stocks in strong sectors for long-trades and weak sectors for shorts. For Multiday-trades, you can check first the trend on weekly charts and buy the dips or sell the bounce back on daily charts. These kind of entries would allow you to apply low risk money-management rules. Whichever system you intend to use, make sure, that it enables you to pick low-risk entries. The stop is your last line of defense. If the trade turns out to be correct, then your logical stop should not be hit anyway. Another part of the system, which has an direct impact on your money-management abilities is profit-taking. You can only manage what you have in your account. It is good and important to determine possible profit-taking points in advance, but remember, the markets do what they want to do and there's nothing you can do about it. The advantage of a trendfollowing-system approach is, that you can really let your profits run until a: your trailing stop has been hit by a reversal a reversal, or b: you reached a multi - R profit-level which satisfies you and you decide to take some money off the table. As long as the trade keeps going in your direction, why limit yourself to a pre-determined exit level ( be it a time stop or a price level )? The market doesn't care anyway where you set your target price and your stops. As for position-sizing : As a general rule, Low volatile, strong trending stocks allow you to put on larger positions or even scale-in strategies, while highly volatile stocks demand relatively small positions in order to keep the risk manageable. BTW : this has nothing to do with the exchange where a stock is trading, there are plenty of low volatile stocks among Nasdaq stocks as well. If you can't take a 100 share position in a NYS stock because of it's high price or high volatility, than it's better to pass on that trade. If you can practice proper money-managent only with odd lots because of the risk-rules and you want to trade with IB, why not consider only nasdaq and Amex stocks ? In the end, it doesn't matter whether your profit comes from stock you "Like" or from a stock you never heard of before. As you want to treat stock-trading as business, try to take only those trades which offer you the highest probability to help you grow your business. Sorry for the long post, but I thought, it would be necessary to point out, that risk-management is not simply tied to following a strict stop-loss % level but adapting the risk-management to your trading-system, and the underlyings you're going to trade.
Just for clarification : "BTW : this has nothing to do with the exchange where a stock is trading, there are plenty of low volatile stocks among Nasdaq stocks as well. If you can't take a 100 share position in a NYS stock because of it's high price or high volatility, than it's better to pass on that trade." - This refers only to IB's odd lot trading rules and a small account : No odd lots trading possible for NYSE stocks and certain Index-shares traded on AMEX or NYSE with Interactive Brokers.
Long posting??? As long as its THIS good PLEASE KEEP IT COMING he he. Thanks for the effort guys, all of you! Alex