Proper Trade Size ?

Discussion in 'Risk Management' started by jwcap, Aug 28, 2012.

  1. jwcap


    I have a 50,000 account and I use the formula on proper trade size as:

    Risk - Commission / Difference between entry and stop.

    Makes sense but then I was looking at trading some JNJ. Here's how it would come out.

    $500 - 4.95 commission / 0.47 (based on average ranges I am using)

    this gives me a trade size of 1053 shares. The problem with that is I would be buying ~$71k worth of stock

    It is a margin account but that's just for one position. How do you deal with this?
  2. Buy deep iTM money options with a delta of .90 or higher.. basically acts as a surrogate for the stock... providing leverage with considerably less capital outlay... allows you to capture the majority of the underlying's move... and since high delta virtually eliminates the effects of time decay and IV... as your entire premium for the most part is intrinsic value. Based on your example-- 10 contracts approximately would do it... requiring currently on the Sept. front month-- less than $ 4k of capital outlay. If your time horizon is farther out-- go out the next mth to Oct-- deep ITM 62.5C will run u a little over $ 6k.
  3. I use the lesser of;

    1) Account size divided by target number of positions divided by share price (incl commissions both ways) or,
    2) Allocated risk divided by value of stop loss.

    Target number of positions - I usually work with 7 or 8 as I want diversity in my trades, likewise I would not trade more than 2 strongly correlated positions like banks, even if all banks are moving.

    Allocated risk usually from 0.75% to 1.5% of total account value. If I'm trading well and making good calls, it's at the upper limit. If I'm not then I scale it down.

    One more criteria is total amount at risk, which I set at 10% of total account value, but reduce to 6 or 7% if the market is choppy. This automatically controls the maximum number of positions I can trade depending on allocated risk per position.