Position trading question - position sizing & stop placement

Discussion in 'Trading' started by Cutten, Oct 9, 2003.

  1. Cutten


    I'm interested in what kind of money management people use for position trades. How much of your account do you place in any given position, what size stop do you use relative to the market (i.e. in the S&P would your stop be 2% away, 5% away, 10% away or more?) and relative to your total account (i.e. what's your max % risk on one position).

    With long-term trades, I find that you need to give them quite a bit of wiggle room to work out. Even if you make the perfect entry with a close stop, if it works out then pretty soon you are looking at giving back quite a bit when the market has one of its inevitable pullbacks.

    What I see during most bull or bear runs is several entry points where you can risk a modest amount. However, in most cases the risk is somewhat higher. So I'm interested in how much people put on the line when a 5-6% correction is quite common and 10% is not unheard of, even in a decent bull market. A good example is the Yen right now - the trend is for lower dollar prices, but the potential for intervention raises the risk of a sharp retracement.

    Personally in entering something like the currencies, T-bonds, or S&P, I might use say a 3% stop, give or take a little, assuming I can get a good entry point. I.e 30-ish points in the S&P, or 3 and a bit points in the T-bond or Euro, etc. But once I am in a position and it has a decent profit, I widen my stop quite a bit. In the S&P I would not sell out unless there was at least a 6% correction from the high. In the Bonds or Euro, I would need a similar retracement to get out. In more volatile markets, I would have a wider stop.

    As for how much to risk on any given position, I want the downside to be about 2% from entry. I allow the risk to run higher once the trade has gone my way and is showing a good profit. But if the market starts acting like a correction is likely, I will sell off some of my position and/or tighten my stop, to reduce the risk back to 2%. In any case I will have a worst case stop of 5% from any open position.

    This allows me, with selective and well-timed entries, to go for 15-25%+ long-term moves with a 3% stop from entry. Thus I'm risking 2% of my capital, to potentially get 10-16% returns on one position. So I find that catching 3 good trends per year is sufficient to get a nice return (obviously I have a number of losers too, sometimes I get out too soon, and not all trades go that far - but 3 trends a year normally means 25%+ returns).

    When I totally miss the optimal entry point, I find I have to risk say a 6% retracement from the entry price, and now my return is say 3% lower (as I missed the first few easy points), giving say 12-22% upside compared to the 15-25% example above. So keeping capital risk from entry to 2%, means taking a half-sized position - giving me 6-11% (half of 12-22) upside per profitable position.

    Any comments on my risk, stop placement, and position sizing? Is it an error to make any distinction between capital risk from entry, and capital risk from drawdowns in a winning position?
  2. jessie


    I will risk anywhere from about 1-2% on any one idea, and my stops are about 1 1/2 standard deviations out. I prefer using SD rather than a fixed %, as it constantly allows for flexibility with shifting volatility.
  3. T-REX


    Depending on "HOW" & "WHEN" you enter the trade you should be able to use "TIGHT" stops initially and then trail the position using the prior days low as the trigger to take profit and/or reverse the trade.

    I publish these signals every day in my Swing Vix FORECAST.