Equity Traders - Position sizing and unpredictable gaps

Discussion in 'Risk Management' started by quin8670, Dec 30, 2011.

  1. I have a swing trading strategy that trades S&P 500 stocks.

    The largest position size I'm allowed to take based on my rules is 20% of capital.

    My thinking in regards to this is simple - I assume there is a chance that a stock could gap up or down by 50% and though extremely painful, I could weather a 10% hit to my account.

    What are your thoughts on my position sizing? Do you think I'm being overly conservative?

    Even if I allocate 20% of capital to a trade, the risk to my overall capital based on my stops is usually in the .01% to .05% of capital range.
  2. if a stock gaps beyond your stop (long or short, long if there's fraug aka SINO or short stock is bought out) stops are useless. if you allocate 20% of your equity to a stock and it drops 50% overnight you lost 10% of your total equity, not 0.01 or whatever small % you planned based on a stop working. either reduce size and/or use otm options to hedge.