Monday, May 11, 2009

Quick Money Management Post

I wanted to make a quick post rehashing and giving some more specifics on money management and account allocation ideas for these blog trades. I have suggested in the past to take a look at the "best posts" section on the right side of the page to get some basic ideas, but for most people who are into trading, I really assume that you know the basic rules that are often suggested regarding risk per trade etc. Also, there will probably be very significant differences in account sizes and risk tolerance for people following this blog, which makes it impossible to suggest one ideal strategy.

Because my focus for the last month has been on getting in at low risk points that have the potential to be a major bear market rally top, I have recently been suggesting stops more so than in the past. This has resulted in a couple breakeven type stop out trades and a couple stop outs for losses (not exited with short-term indicator signals). While basically all of those trades would have been positive if exited using my usual short-term exit signals, I have discussed that the purpose here is to try to get a huge reward on risk trade for a longer holding time, and then get back to concurrent short-term trades if/when the market clearly turns down in coming weeks/months.

So there are really two types of trades on this blog 1) those with stop losses and 2) those without stop losses. The first type are best handled by using the stop loss point to calculate a risk per share, and then use that to determine position size based on a predetermined standard percentage of your account that you risk on every trade (suggestions below). The second type I think is best handled by thinking in terms of how much of your entire account you will devote to the trade or by having a standard fixed dollar amount that you devote to every trade. Since there is no defined risk, you are instead relying on % allocation to roughly estimate risk.

So here are my basic ideas on this for anyone who is interested......

For trades with a stop loss recommendation (defined risk per share):

Account size over $100,000 risk 0.5% per trade
Account size $20,000-$100,000 risk 1% per trade
Account size $5,000-$20,000 risk 2% per trade
Accounts under $5,000 risk 3% per trade, but if you have a very low commision broker ($1 or less per trade) then just still go with 2% risk

For trades without a stop loss recommendation:

Since I have started the blog, the average losing trade has been 2-3%. So, 33% of an account devoted to the trade on average would be about 1% risk per trade if it ends in a loss. So that would be about right for $20,000+ account sizes.

For an account around $10,000 I would say you could go up to 50% or a little more, still being pretty conservative.

For small accounts like $5,000 or less (and if this blog is your only trading methodology) I think putting your whole account in on each trade would be fine until you build it up more.

Referring to the results of all blog trades in the past, devoting the entire account to each trade would have resulted in the best performance, but obviously you have all your capital tied up and potentially at risk and I wouldn't suggest that for larger accounts because a dollar is still a dollar no matter what fraction of your account that dollar happens to be.

So those are my rules of thumb for money management, but obviously if you have a good reason to deviate from them, then that is up to you.

As a quick side note, the last BGZ trade was stopped out for a loss on Friday. Based on the most recent data, I will be looking to get back in a trade as soon as a good opportunity presents itself. My only regret with this last trade is that I knew that the QQQQ/tech reversal candles were much stronger and less likely to get stopped out (they wouldn't have been even very close to being stopped out) on an otherwise good trade, but I went with BGZ (3x) for the trade rather than QID (2x). While the market may prove me wrong, the tech reversal this past week was so imposing, that I think this past week was basically the top of this rally. So, I didn't really WANT to be stopped out. But that is in the past now, so I would just encourage blog traders to continue to make the trades even if a couple losers shook your confidence. The "smart money" is selling into the "dumb money" buyers right now, and we want to bet with the smart money. More on this in the next post.


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