"You did not really answer the question? In such illiquid stocks, how do you get out if it trades against you? This is at best a 50-50 business so you must have a rule to ensure your position size does get too big relative average volume. Or not? Maybe 10% of 30 day average volume? In general, I do not think you are trading much money, because otherwise you would have such a risk parameter."
As I have said I do not trade Goldman size portfolio but a decent sized account.
My max positions in number of shares in last year have been in 5000-7000 shares range. My strategies are designed for aggressive growth in my current account. I do not worry too much about its size, I worry about growing it aggressively, while prudently managing risk.
After a initial year brush with major draw down in one thinly traded stock where I lost 30% within matter of minutes, I am extremely cognizant of risk.
How do I exit such stocks:
- I exit on trailing stops. Trailing stops move more aggressively as profit in my position increases.The moment I have more than 50% plus profit in a position, I move stops aggressively to try and protect profit as much as possible.
- I exit if I see volume increase but price is not making corresponding move up indicating churn. This is very common in stocks after they made major moves.
- I exit if stock goes in to a climax run.
- I reduce my risk by timing entry after a 65 day weakness in strong trending stocks.
- I use a liquidity filter on all trades except the earnings trade, where the nature of trade s such that the earning acts as a catalyst on such stocks. Here again I am buying after an event, which reduces risk.
- I buy stocks after they have already moved 100% plus from 260 days lows. The first 100% move is where the liquidity comes in on neglected stocks. Anyone who makes an effort to go though all the stocks in 100% plus universe will understand that by the time a stock makes 100% move, the liquidity has increased in majority of cases.
- In Episodic Pivot, which is the main method which contributes to my profitability currently, anyway the minimum volume requirements for a stock to come on scan itself are significantly high. That automatically weeds out low liquidity stocks.
- Above all I use a market filter to identify less risky and more risky periods. It is my observation that the stocks I trade and some of which are thinly traded, have big adverse moves only during certain periods. By trying to avoid such periods the risk is lowered. When 50% plus movers in month are above 20, I have least amount of money at risk and willing to go in to cash at any moment.
I am very conscious of risk in everything I do and try and control as much as possible by controlling what I can control.
I have also given lot of thought to how I will play this once my size account size increases. At a bigger account size in few years, I will trade this with anywhere between 50 to 100 positions in portfolio with each individual position ranging from .5 to 4% of account size based on liquidity.
Besides that I think I have an inventive mind and confidence that I can design strategies even if I have to trade billions. Besides the strategies which I have talked about publicly, I have in my arsenal many strategies suitable for trading higher liquidity stocks or the large caps or the Index. So I will trade the big account differently.
When I last checked the list of successful traders and studied their biographies, at least in my studies it shows that most of them started with small accounts and built them up.