I am a newbie NYSE swing trader. I have just finished Toni Turner's "A Beginner's Guide to Short-Term Trading". I would like to know what you all think of the following capital allocation rule she gives in chapter 11. I quote, "Commit no more than 33 1/3 percent , or one-third of the capital in your account, to a single equity. " The more common rule I've read elsewhere is to use a 5 to 10% per stock limit. I currently using a 5% allocation with a 10% lost limit on each position. ( I found that a 10% allocation limit with a 10% lost limit was generating too costly "tuition fees".) But I would like to know where she came up with the 33 1/3 percent figure. Its so specific that I have to think there's some reasoning behind it. I have sent her website a email, but it may not be answered for awhile, and I would really like to know. Once I've got the trading skills down pat on 5%, I'd like to get my allocation up to lock in more profits from my efforts.
If your going to hold overnight, I wouldn't put 1/3 in one position. I believe 4-5% per position eliminates most individual stock risk. Also, stop losses play a role, but there's always the unforseen spikes, halts, and gaps intraday and overnight that can't be prevented with stops. It sure is easier to manage 3 stocks though. Maybe a statistician can refute what I say, but I know some of the hits I've taken would've been very painful using a 1/3 of my account on one position.
I guess theory and reality aren't always the same. I know 5% is a good number statistically, but I've used 10% per position for years without problems. A 10% Stop Loss is pretty steep for me though for swing trades. Mine are closer to 5% but vary depending on volatility.
I forgot to mention that my 10% stop loss is transitional. I used that when I was doing CANSLIM/PITBULL trades (which did not work for me because I couldn't tell which New High would breakout without falling right back down). Now that I'm swinging, with technicals, I'm using lower stop loss percentages.