12/31/2010

How to approach per trade risk

One of the key determinant of your returns is how much you risk per trade. Given same number entry and same exit your gains is a function of how much you risked on a trade. 


Let us say you hold 25 open positions with 4% allocated to each and buy a stock at 10 and sell it at 20, you will make overall 4% profit on your account. As against that if you hold only 4 trades at a time with 25% risk each then on same trade with same entries and exits your overall account will be up 25%.

Traders use various ways to decide on how much to risk per trade. Many times they start using a method to size a trade and stick with it and without paying much attention to its consequences continue to use it. 


If you study various ways to size a position and how it will affect your overall profit then you will be in a better position to decide what is best way to size a trade and what are the advantages and disadvantages of each approach. 


Like everything else in trading the sizing of trade has been studied extensively and you will find that there is lot of information about it in public domain. If you make a one time effort of few days to few weeks researching this are and understanding it thoroughly, you can significantly improve your profits with your existing methods. By just doing proper risk management you can even double your profit if you have been risking very small amounts on trades.

Let us look at some of the most commonly used approaches in sizing the trades. 


The most commonly used approach by many traders is fixed share lots. Lot of time traders buy 1000 or 500 or 300 lot on each trade. This is very common way to trade amongst day traders and swing traders. Buying 1000 shares of 5 dollar stock would have 5000 invested. Buying 1000 shares of 50 dollar stock would be 50000 invested. If your account is 100000 then one trade will be 5% while other would be 50% of your account. If both stocks doubled. In first case you will have only 5% return while in the second case 50% return. 


Due to convenience lot of time traders follow this approach. They just set lot size at 500 or 1000 or any other number and keep buying in those lots. But it is not necessarily the best way to approach risk. Dollars is more important not lot size. 


Fixed amount. Say 10000 in each position. Many traders divide their total capital in some foxed lot of say 10000 and then every time buy only 10000 worth of shares. So in 100k account they will carry 10 positions. The primary reason for this approach is again convenience. This approach also has a problem of allocating too large a amount on lower priced stocks. Besides that it does not account for stop loss properly. 

Some do not put more than 4  % in a single position. In this case they carry 25 positions. This kind of approach reduces individual position risk. If one of the stock gaps down 50% , you would only have overall only 2% loss. This is the kind of approach used by mutual funds. Many mutual funds even go further and hold 100 or more position. One of the problem with such approach is while it reduces risk , it also reduces returns. Greater the diversification lesser is your return. 

How you size a trade also depends on whether you are a trader or investor. As a trader you are  looking for aggressive returns. Your position size as a trader is also function of your trade frequency. If you are trading infrequently like many investors do then they must risk enough on trade to compensate for low frequency. 


A high frequency trader can risk lower and still make higher return if that person rotates capital multiple times. Other consideration for a trader is that you can actively manage risk as against someone who invests. I monitor my positions all the time and can quickly close a position if it is not working or starts going down. The active management of risk gives much more control over risk and as a result I can risk much bigger amounts that someone who can not control risk.


Ultimately several factors go in to determining  your sizing strategy. If your overall goal is triple digit plus profits then your risk strategy will be different from someone whose goal is 20% return for the year. If you are aiming for higher returns you have to risk higher. If your win ratio is 50% you look at risk differently from someone with 70% ratio. As against that a trend follower might have only 25% win loss ratio and need to factor that in. 


Your frequency of trades matter. If you are going to make only 10 trades in a year then your risk approach is different. As against that if you are making 200 trades in a year or 40 to 50a day as some day traders do  your risk approach will be different. Your returns per trade also determine your risk approach. 

If you have been trading for some years or have sufficient number of trades then you can analyse them and have data to work with and then have a much better way to determine your trade sizing. 

I use a % risk model. I risk anywhere from .25 to 10% on a trade. But most trades are around 1% risk. What does 1% risk means? It means how much will be the loss if my stop is hit. So 1% risk means if my stop is hit I will have 1% loss on total capital. It does not mean that I have 100 positions open with 1% risk. 

Actual size of your trade might be much larger in percentage of account invested. You might have 50% of your account invested in one trade and your risk can still be 1%. Because risk=entry price-stop. 

For example if you see one of the swing trade I did in 2010 on GMCR. I got in to the trade at 94.45 and my stop was 94 and my risk was .5% but the total money invested was 105% of the account. Similarly if you see my RIG trade you will see that I entered at 64.45 and stop was 64. The risk was .25% but the amount invested was 36% of the total account. 

In my approach I first determine % of risk to take on a trade. So let us say if the account is 100k and if I decide to risk 1% then the amount to risk is 1000USD.  To calculate the number of shares to buy, find the difference between entry price and stop price and divide the result into 1000.


Number of shares to buy= 1000/(entry price-stop price)



Total account capital=$100000


1%=$1000


Stock to enter= XYZ


Entry price= 25


Stop (minl3)= $24.50


Risk per share= 25-24.50=.50


$1000(1% risk)/$.50=2000 shares to buy


2000* 25 (entry price)= $50000 worth of stock to buy.


So for a $100000 USD account, I will buy 2000 shares of this stock or invest $50000 in this one XYZ stock.


If I get stopped out after buying this stock position, I will lose 1%, or $1000 which is (entry price-stop)

There is a handy calculator to do this here


http://stockbee.biz/position-size-calculator/



In this kind of an approach you can get fully invested in 3 or 4 positions by just risking 1% per trade. If you have 4 positions open with 1% risk each then you have 4% at risk. 


If you find a situation where the distance between stop and entry price is small then you can have a big position in a stock with just 1% risk. If you see some of the trades I did last year, there were these kind of situations where I had anywhere from 50% plus to 105% plus on single trade but my risk was below 1%.

The basic assumption in this calculation is that you will be able to get out at stop price and stock will not gap down significantly below your stop. That is where your skill in selecting stocks to trade and selecting entry point comes in. 


If you see my overall trades over many many trades there are negligible number of trades with 10% plus loss. There were only 4 trades with above 10% loss and out of that only one trade where loss was more than 10%. The worst loss on a trade was 12.28% on a single trade on invested capital. But as a % of account that loss was only .92% loss. 


Overall out of all trades only .04% trade has a loss of 1% plus on overall equity. The worst loss was 1.77% but on that particular trade the risk was 2% so it was still below pre determined risk.

The kind of approach I use can help you quickly ramp up your gains under right conditions. Your risk is of a stock gapping down more below your stop and making 1% risk much bigger risk. 


One of the ways some people reduce that kind of risk is by specifying a limit on a single trade size. Like saying 1% of account at risk but individual position should not be more than 30% of account. Or by specifying only 6% of account should be at risk at any time.

You can use Telechart PCF to do above calculation instead of using my calculator. That is quicker way to find how many shares to buy once a Trade Alert is issued. For that follow following steps.

Let us assume you have 100000 in account.

Then a PCF for deciding number of shares to buy for 1% risk will be  

100000/100/(c-l)

This assumes your stop is low of the day.

Now you need to change your capital amount everyday for this pcf to work. Let us say you closed a trade and your new capital base in 130000 then the pcf needs to change to

130000/100/(c-l)

A PCF for deciding number of shares to buy for .5% risk will be  

100000/200/(c-l)

A PCF for deciding number of shares to buy for .25% risk will be  

100000/400/(c-l)

The risk approach above should be married with other things like market timing, situational awareness, stock selection, and your cumulative returns till date. 


As you will see I take smaller risk positions if market direction is uncertain. Similarly I risk less when market is in extreme zone and has higher probability of reversal. Same way not every idea is worth risking 2% or 5%. So very few trades have that kind of risk. 


There is also phasing of risk. Once you are up 50% plus in first few months your risk strategy can either protect that profit or use that profit buffer to go for a kill. These are all variables which are under your own control and you have to use them based on situation. 

Overall as a general observation, concentrated position is key to high returns. Diversified positions reduce risk and returns. Concentration builds wealth, diversification protects wealth. 


Your risk approach should be based on what stage you are in. Are you in wealth building stage or in wealth protection stage. That question depends on each individuals specific life situation. 


Every trader has different risk tolerance and based on their situation they should find their own risk management strategy. 







Are you serious about your trading?

If you are serious about your trading and want to build an enduring edge the Stockbee Member site might help you. Members tell me they have tried lot of things before coming to my site and it has offered them the most extensive and detailed methods to swing and position trade.

It is only for those who want to develop their own self sufficient trading method. It is not a stock picking service. It is service for you to build your own scans and trading method to have your own daily pick based on your method.

Be warned it will take you time to learn to trade. Learning to trade is difficult art and unless you are willing to spend months or years to perfect your strategy and also develop your mental edge you are unlikely to succeed in this game. Unless you understand that no site, no service, and no mentoring is going to work.

Why traders come to stockbee?

The member site is one of the most recommended site for learning to trade by other traders and bloggers. You will see no advertising, no hard marketing, no promotions, no free offers, no affiliate marketing, no incentive to other bloggers to promote the site, no constant twits self promoting the site, no free trial  and no tall claims of making you instantly wealthy, and yet the site attracts new  members everyday. Members come from all walks of life and all kinds of trading size and trading styles.

You will see that many trading bloggers have been using my market timing methods, scans , stock ranking lists and chart templates. They have developed their own methods based on my methods. Many paid newsletter site recommend my site to their subscriber for learning about trading and market.

Over the years thousands of traders have been members and those who benefited from the learning talk about the site to others or talk about the methods used and that is how new members learn about the site.





What will I learn in the members site?

The members site will give you in depth understanding to develop your own trading method. The emphasis is on making you self sufficient and confident of your own trading method and style.

As a member you will learn the basics of swing trading, momentum investing, growth investing and risk management.

You will learn about Stockbee Trend Intensity Breakouts method that uses momentum based swing trading to find 3 to 5 day swing trades for 8 to 40% profit.

You will learn about Stockbee Episodic Pivots Breakout method which uses Post Earnings Announcement Drift (PEAD) to find stocks that had a game changing earnings and that are likely to rally for 3 months to 12 months.

You will learn about  Stockbee Dollar Breakout method that uses momentum, range expansion and swing trading approach to find 5 to 40 dollar moves in high priced stocks.

You will learn about  Stockbee Lemonade Strategy for 401k which uses market timing and momentum to invest in 401k. You will get weekly update on how I am using the strategy on our 401k to do allocation decision.

You will learn about Stockbee Market Monitor method for market timing using breadth. It allows you to avoid risky periods in market and allows you to identify market turns. It is used for 401k allocation decisions.

You will learn about Stockbee Double Trouble method to find stock with confirmed upside momentum using anchored momentum and that are likely to continue their up move.

You will learn about Stockbee Night Time is Right Time method to find news catalyst based trade ideas for short term day trade and swing trade.

You will learn about Investor's Business Daily’s IBD 200 list and how it can be used to find swing trading candidates for explosive moves.

You will learn about Telechart 2000 and how to use it effectively to scan for swing and position trade ideas and to set up your 401k strategy.

You will learn about Jesse Livermore Range Breakout, Darvas Box setup, and many other member shared methods.

You will learn how to set up your own scans, select right kind of stocks, how to set up stops, when to enter , when to exit, how much to risk, how to track your trades and all other details about trading. You will learn about developing your own methods and not relying on others for trade ideas.

The site has hundreds of videos and trading methods and variation of methods. Members help each other in developing the methods and share actively their research and finding. A collaborative spirit allows you to get input from others on your trading ideas or problems.

The site gives you opportunity to interact with some of the most successful traders and learn from them about their trading methods. It is a vibrant community with members from different background and experience willing to help each other. The emphasis is on continuous learning and up gradation of market knowledge and setup knowledge. The members range from hedge fund employees, financial advisers, active swing traders, investors and new traders.

If you are looking to develop your own trading strategy the membership site might be for you. You have to be willing to put in the effort to build your own method. There are no silver bullets offered on members site. Every method, every scan, every nuance is detailed and all possible help is offered to design your own method.

Do you have a trial?

If you are just looking for trial you are better off trying thousands of other trading sites that offer free trial or one month trial and offer you promise of riches.

It is for those who are ready beyond the trial phase and ready to put serious months or years  of efforts to learn to trade on their own. It is for those who want to learn to find their own fish.

The free blog has all the details about the methods I trade and if you go through the posts highlighted in the sidebar you will learn about them.



How can I become a member?

To sign up go to www.stockbee.biz and follow the sign up process. The site uses Paypal for payment processing.

12/30/2010

My Reading List for next 4 days

  1. Super Performance Stocks by Richard Love
  2. How to Trade in Stock Livermore
  3. How to make money in stocks O'Neil
  4. Monster Stock By John Boik
  5. How Legendary Traders Made Millions by John Boik
  6. Jonathan Livingston Seagull
  7. A whack on the side of the head
  8. A Kick in the seat of the pants

Member Feedback

It has been an amazing ride this year. At one point today I was up 78% for the year. While fumbling back and forth on thinkorswim charts I noticed that CHGS had hit a high of 6.74 today, and was at 6.18 when I decided to exit. It was a day trade anyway as I had gotten in at 4.95.
In any event, as it is 11:47PM for me, I am calling it a day. I'm looking at my ToS account right now and I am up 68.63% for the year. I won't trade anymore so that is official. Now I need to promptly take out X amount for taxes.
The above has only been possible thanks to this site and easyguru. Of course all of the miscellaneous posts with various ideas have been incredibly helpful. Happy New Year everyone!
Oh, by the way, the above gains are for my trading account and the effective start date is 20 July 2010 through the end date of today, 30 Dec 2010.

JP

12/29/2010

How to be profitable in 2011


Profit in 2011= Self efficacy beliefs (80%)+procedural memory (15%)+method (5%)
The most important determinant of your success is your self efficacy beliefs. After that is ability to develop procedural memory. The least important thing is method, scans, software, tactics and so on.
If you have self efficacy you will find a method. If you don't have it, even the most profitable method will not work for you and you will keep finding faults with methods.
Self efficacy beliefs is the biggest determinant of your trading success. This is true of life as well. 
Your self efficacy beliefs determine your success in any domain. Unless you work on that you will find many inhibitors and will be constantly dissatisfied with any method, guides, videos, or instructions, or site.
Albert Bandura first wrote about self efficacy in 1977. His research on self efficacy is considered most influential in developing social learning theories. Anyone who has taken a course in educational psychology would be very familiar with Albert Bandura's work. He defines perceived self-efficacy as people's beliefs about their capabilities to produce designated levels of performance that exercise influence over events that affect their lives. Self-efficacy beliefs determine how people feel, think, motivate themselves and behave. He postulates that self efficacy beliefs determine whether or not a certain behavior or performance will be attempted, the amount of effort an individual will contribute to the behavior and how long the behavior will be sustained when obstacles are encountered. So self efficacy becomes very critical in learning complex skills like trading. 
Self-efficacy beliefs also help determine how much effort people will expend on an activity, how long they will persevere when confronting obstacles, and how resilient they will be in the face of adverse situations. The higher the sense of efficacy, the greater the effort, persistence, and resilience. 
Profitable trading involves all these challenges. You need to put in lot of effort to understand and internalize key concepts like equity selection, entries, exits, risk, risk/reward and then put it all together. In the process you will have several setbacks and false starts. If you have enhanced self efficacy beliefs you will persist in face of such adversities. If you have high sense of self efficacy beliefs then you will spend time mastering trading software, and mastering  trading setups and make them work. Absent that you will abandon your effort at first hint of failure. 

People with a strong sense of self efficacy beliefs approach  difficult tasks as challenges to be mastered rather than as threats to be avoided. They have greater intrinsic motivation. That helps them to engage for long periods in activities and helps them overcome repeated obstacles. 
People with high self efficacy beliefs set themselves challenging goals and maintain strong commitment to them, and heighten and sustain their efforts in the face of failure. People with high self efficacy beliefs quickly recover their sense of efficacy after failures or setbacks, and attribute failure to insufficient effort or deficient knowledge and skills that are acquirable rather than external circumstances.
Your self-efficacy beliefs also influence your thought patterns and emotional reactions. This is critical in trading. You should not be overly excited by profit on single trade and same way not get depressed by loss on single trade. At the end of the day trading is probability game. High self-efficacy helps create feelings of serenity in approaching difficult tasks and activities and activities where outcome is uncertain.
If you have  low self-efficacy beliefs then often you believe that things are tougher than they really are. As a result this  belief that fosters anxiety, stress, depression, loss of discipline, over trading and a feeling of being lost. You are unable to solve your own trading problem. 
Psychologists believe that  self-efficacy beliefs  influence the level of accomplishment that one ultimately achieves.Self-beliefs can also create the type of self-fulfilling prophecy in which one accomplishes what one believes one can accomplish. This further enhances self efficacy beliefs. This leads to higher performance this in turn leads to higher effort and higher accomplishment which in turn further enhances self efficacy. In trading terms if you make 75% profit two years in a row, then you aim higher and if you achieve those targets then your self efficacy beliefs get enhanced. Your self efficacy beliefs will determine your level of  perseverance.

If psychologists have found self efficacy beliefs are so critical to success then the next logical question is How to enhance your self efficacy beliefs..
Self efficacy is built through four processes:
  1. Mastery experience
  2. Role modelling
  3. verbal persuasion
  4. psychological cues.

These four are in order of importance. Most critical way to build self efficacy is through a mastery experience.
Mastery experience is basically a successful experience of mastering a task. Mastery experiences happen when the learner has reached the point where they understand the content knowledge enough to perform a task on their own or masters the task. It happens if the learner goes in to sufficient depth on material he is trying to learn. It happens as a result of immersion in a particular field or task. It happens with plenty of prior exposure to the content. At some stage the learners are able to interpret the results of their actions and use those results to develop their own capability to engage in future actions or tasks. Then the learner become auto learners. They are able to participate in tasks on a first hand basis with little or no assistance from outside influences. When you experience a intense mastery experience you get a feedback on your own capabilities. Long and sustained efforts are required for mastery experience.
Self efficacy beliefs are critical not only in academic situation but in any task like sports. Self efficacy beliefs are task specific. So a person might have high perceived self efficacy beliefs in one subject but have less self efficacy in other field. Self efficacy builds over a period of time and more mastery experience you have, you become better at a task and learning other tasks.
Mastery experience is the main source of self efficacy. All other things are secondary. In training or coaching situation one can structure the situation in such a way that the trainee experiences a mastery experience. This is the fundamental principle used in training commandos and marines. In simulated and controlled situation they are put in situations where intense learning happens in a very short period of time. That creates a mastery experience. That forever enhances the trainees perceived self efficacy belief. Some years ago Discovery Channel had a 6 part series called Navy Seals Buds Class 234 , if you watch that , it is excellent example of creating mastery experience in a simulated environment. If you work for a successful start up at early stage, you will have a mastery experience. That is why you will find many successful entrepreneurs become serial entrepreneurs.
Many people go through a lifetime without having a intense mastery experience in any field and so have low self efficacy belief.
If you want to enhance your trading skills and improve your profits in 2011 then you must have a strategy to enhance your self efficacy beliefs. That should be part of your 2011 trading plan.
Over the years I have written extensively on self efficacy beliefs and their importance in trading and how to enhance them. If you search this site or the members site you will find several posts on the topic. 

If you need help researching this topic further or looking for books , videos on this topic, shoot me an email and I can guide you in right direction. 





Are you serious about your trading?

If you are serious about your trading and want to build an enduring edge the Stockbee Member site might help you. Members tell me they have tried lot of things before coming to my site and it has offered them the most extensive and detailed methods to swing and position trade.

It is only for those who want to develop their own self sufficient trading method. It is not a stock picking service. It is service for you to build your own scans and trading method to have your own daily pick based on your method.

Be warned it will take you time to learn to trade. Learning to trade is difficult art and unless you are willing to spend months or years to perfect your strategy and also develop your mental edge you are unlikely to succeed in this game. Unless you understand that no site, no service, and no mentoring is going to work.

Why traders come to stockbee?

The member site is one of the most recommended site for learning to trade by other traders and bloggers. You will see no advertising, no hard marketing, no promotions, no free offers, no affiliate marketing, no incentive to other bloggers to promote the site, no constant twits self promoting the site, no free trial  and no tall claims of making you instantly wealthy, and yet the site attracts new  members everyday. Members come from all walks of life and all kinds of trading size and trading styles.

You will see that many trading bloggers have been using my market timing methods, scans , stock ranking lists and chart templates. They have developed their own methods based on my methods. Many paid newsletter site recommend my site to their subscriber for learning about trading and market.

Over the years thousands of traders have been members and those who benefited from the learning talk about the site to others or talk about the methods used and that is how new members learn about the site.





What will I learn in the members site?

The members site will give you in depth understanding to develop your own trading method. The emphasis is on making you self sufficient and confident of your own trading method and style.

As a member you will learn the basics of swing trading, momentum investing, growth investing and risk management.

You will learn about Stockbee Trend Intensity Breakouts method that uses momentum based swing trading to find 3 to 5 day swing trades for 8 to 40% profit.

You will learn about Stockbee Episodic Pivots Breakout method which uses Post Earnings Announcement Drift (PEAD) to find stocks that had a game changing earnings and that are likely to rally for 3 months to 12 months.

You will learn about  Stockbee Dollar Breakout method that uses momentum, range expansion and swing trading approach to find 5 to 40 dollar moves in high priced stocks.

You will learn about  Stockbee Lemonade Strategy for 401k which uses market timing and momentum to invest in 401k. You will get weekly update on how I am using the strategy on our 401k to do allocation decision.

You will learn about Stockbee Market Monitor method for market timing using breadth. It allows you to avoid risky periods in market and allows you to identify market turns. It is used for 401k allocation decisions.

You will learn about Stockbee Double Trouble method to find stock with confirmed upside momentum using anchored momentum and that are likely to continue their up move.

You will learn about Stockbee Night Time is Right Time method to find news catalyst based trade ideas for short term day trade and swing trade.

You will learn about Investor's Business Daily’s IBD 200 list and how it can be used to find swing trading candidates for explosive moves.

You will learn about Telechart 2000 and how to use it effectively to scan for swing and position trade ideas and to set up your 401k strategy.

You will learn about Jesse Livermore Range Breakout, Darvas Box setup, and many other member shared methods.

You will learn how to set up your own scans, select right kind of stocks, how to set up stops, when to enter , when to exit, how much to risk, how to track your trades and all other details about trading. You will learn about developing your own methods and not relying on others for trade ideas.

The site has hundreds of videos and trading methods and variation of methods. Members help each other in developing the methods and share actively their research and finding. A collaborative spirit allows you to get input from others on your trading ideas or problems.

The site gives you opportunity to interact with some of the most successful traders and learn from them about their trading methods. It is a vibrant community with members from different background and experience willing to help each other. The emphasis is on continuous learning and up gradation of market knowledge and setup knowledge. The members range from hedge fund employees, financial advisers, active swing traders, investors and new traders.

If you are looking to develop your own trading strategy the membership site might be for you. You have to be willing to put in the effort to build your own method. There are no silver bullets offered on members site. Every method, every scan, every nuance is detailed and all possible help is offered to design your own method.

Do you have a trial?

If you are just looking for trial you are better off trying thousands of other trading sites that offer free trial or one month trial and offer you promise of riches.

It is for those who are ready beyond the trial phase and ready to put serious months or years  of efforts to learn to trade on their own. It is for those who want to learn to find their own fish.

The free blog has all the details about the methods I trade and if you go through the posts highlighted in the sidebar you will learn about them.



How can I become a member?

To sign up go to www.stockbee.biz and follow the sign up process. The site uses Paypal for payment processing.