All Entries Tagged With: "Position Size"
Think Like a Poker Pro
April 4, 2012 at 7:40 am
I love the movie Rounders, in which Matt Damon is a poker player looking for a big break (and then a way to get out of some serious trouble).
In the movie, his character Mike McDermott makes a comment early on that as a player, “your goal is to win one big bet an hour – that’s it.”
Notice he said “win one big bet” rather than “place one big bet.” There’s a key distinction here and it applies to trading.
Amateur Hour
Amateurs too often think they need to place some big bets in order to win big. They couldn’t be farther from the truth.
Amateurs are also generally too proud to fold. That’s admitting defeat, and rather than seeing the bigger picture of losing some battles in order to win the war, they take a stand when they shouldn’t – and they pay for it.
How the Pro’s Play
Professional traders, on the other hand, realize there’s plenty of quiet time to endure before those payout opportunities occur. They realize it’s a matter of hanging around, staying in the game, in order to be fit to capitalize on the best “hands” they are dealt.
Professionals understand that taking small hit after small hit is easily undone by just a win or two – so long as they’re losing smaller and winning bigger. Be willing to fold repeatedly if necessary – the goal is to be net profitable, but that won’t happen every single time you commit your capital.
Trading is a numbers game, and professionals only play (or play for meaningful stakes) when conditions are most favorable. Very simple, but very difficult for many amateurs to do.
So the question is… are you thinking (and acting) more like an amateur or a pro?
(Hint: your results are likely already reflecting it.)
Trade Like a Bandit!
Jeff White
Producer of The Bandit Broadcast
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Trading Timeframe Influences Position Size
December 13, 2011 at 8:58 pm
Equally important to locating entries and exits is the matter of sizing your positions. Too much and you can’t stick with the trade plan, aborting in favor of diminishing emotions (whether greed or fear). Too little and you don’t maximize the use of your capital.
While some traders prefer a standard lot size, in this video I’ll discuss the notion that your timeframe for the trade should influence your position size.
Yes, the chart itself will help determine your exits, but that’s also a function of how long you’ll expect to be in the trade.
Check out the video for a quick 5-minute explanation and you’ll see exactly what I mean.
(Direct video link is here for those interested in sharing).
Be sure to view in HD (720P) and full-screen mode for best quality in the video.
Trade Like a Bandit!
Jeff White
Producer of The Bandit Broadcast
Follow TheStockBandit on Twitter or get our free newsletter to keep up!
Weighing Risk & Reward on Day Trades
August 30, 2011 at 8:48 am
A trader on the email list received a recent video I sent out on stops, and came back with these questions:
“Excellent video, please keep sending more. But how do you determine ‘risk reward ratio?’ Your day trading strategy points to a starting point for a stop loss at 1%, so how do you determine that it has 2-4% of upside potential?”
Great questions! Here’s how I responded…
For most stocks, a 2-4% intraday move is not out of the norm on any given day (especially lately). That’s well within the wheelhouse for most stocks I trade, whereas those without the propensity to move I simply ignore and don’t earmark as trade candidates.
When I do run across a stock that’s more volatile, I’ll cut my size in half and give it 2% from entry, and then expect a multiple of that on the top side (so I’m looking for 4-8% on the profit side to offset the risk).
As for knowing if a stock has that ability to move, for me it’s mostly a feel thing since I’ve traded so many stocks over the years and I watch the market every day, so I’m familiar with their movement to that extent. For anyone who isn’t, even applying a basic indicator such as the ATR (average true range) to a chart will give you an idea of how much that stock moves on a given day. It doesn’t have to get complicated, but that will allow you to structure your trade (or skip it entirely) based upon typical movement.
How do you determine your risk/reward?
Trade Like a Bandit!
Jeff White
Producer of The Bandit Broadcast
Lighten and Tighten
June 6, 2011 at 11:38 am
An absolute commitment is required for some things in life, like let’s say, a social function. Either you’re going or you aren’t, right? However, other things might require a lower level of commitment. Your diet, for example, might currently be more of an “I’m trying not to eat too many sweets” approach right now. That’s what I’d call a partial commitment, where it’s not an all-or-nothing approach.
When it comes to trading though, far too many traders think they have to be “all in” or “all out” of their positions. Nonsense! Think outside the box a little.
On the surface, we know that commissions are so cheap these days that there is no problem with splitting up positions by making partial exits when a situation calls for it, so that shouldn’t hold you back from adopting this mindset.
There are some occasions when it’s very useful for me to either lighten my position size, tighten my stop, or both. Let’s look at some examples of each, and I hope you’ll add your own thoughts to these in the comments below.
Lighten!
* I should clarify that I’m talking here about lightening up on a position mid-trade. This is not to be confused with when to trade smaller.
Lightening up on a position is a way to Defend both my capital and my profits. Whenever I get a poor fill on a trade where my order is executed at a price which is considerably different than my trading plan accounted for, it’s time to lighten up. By definition, the risk/reward profile of the trade has changed (since the entry price has changed and my stop is now farther away), so naturally I need to make an adjustment. This is the scale I use to do that on my swing trades. Doing this keeps my risk in check with what it should be, allowing me to stick with the trade – even if it’s now a smaller amount.
Tighten!
I won’t enter a trade unless I know my get-out (stop loss), but that doesn’t mean my stop never changes. Sometimes the situation changes in such a way that an adjustment is warranted.
Market conditions may necessitate such an alteration to my plan. Suppose I’m long as a limo, and suddenly the complexion of the market shifts to something quite negative. Maybe news breaks or we see a key reversal set in – well, I’m in denial if I think the landscape hasn’t changed. In those cases, it makes sense to tighten my stops on long positions as a way to shore up my risk.
On a per-trade basis though, sometimes the way a stock moves just happens to change, and that can also warrant tightening my stop. Maybe a stock initially breaks out with momentum, but rather than showing follow through or putting in healthy rest, it simply begins to stagnate. Volume disappears, a sloppy trading range sets in, and I start to see a lack of conviction with weak closes in the stock for several straight days. That’s a time when I’ll definitely tighten up my stop, whether in time or price, as the stock simply isn’t behaving in such a way to deserve a long leash.
Both!
My favorite occasions are those which allow me to both lighten my position and tighten my stop. That usually occurs when my first profit target is hit. That’s a spot where the trade has moved enough to warrant booking some gains (lighten), but the stock may not be done running yet. Typically, I’ll have 2 targets, so sometimes there’s still room for additional gains.
At this point, my initial stop is also now a considerable distance away, so it makes sense to tighten it as well (often to breakeven for remaining shares). This way, I’m risking less on what’s left of my position, while still allowing for additional profits if the stock continues to run. Win/win.
** What are some keys you use mid-trade for knowing when to lighten up on your size or tighten your stop? I have a Bandit t-shirt for the best response, so bring the ideas!
Trade Like a Bandit!
Jeff White
Producer of The Bandit Broadcast
Premature Evacuation from Trades
May 23, 2011 at 10:10 am
All of us have the occasional urge to jump ship early from a trade, but when is it the right time and how should that be done?
Let’s take a look at a conversation I recently had with a trader I was helping…
Hey Jeff,
I’m long ***, as it just looked like a nice setup. I went long 4 days ago, but it is behaving horribly. Currently I don’t see any pattern and would not make this trade now, but it is only halfway to my stop loss. I am unsure what to do. How do you approach trades you aren’t convinced of anymore, but have not been stopped out of?
Also, one of the mantras I read often is “cut losses short, let winners ride.” I am wondering how to interpret this “cut losses?” I find myself thinking, “I am not convinced in this trade anymore, but maybe it will turn around, it’s just half a position left to lose.” When my analysis of the situation shifts, and I wouldn’t take this trade anymore as of today, do I abandon my original plan and exit immediately or should I stay with the trade?
C.
==
Here’s what I told him…
C,
Let me start off by addressing the “cut losses short” question. I don’t have all the answers, but I can tell you that for me, cutting losses means having an exit plan on the downside with defined risks. We will all be wrong at times, but staying wrong is different – don’t stay wrong! Limit your losses so that they can be overcome with reasonable winning trades. Don’t dig a hole so deep you need a miracle to get out – that’s cutting your losses short.
Now let’s discuss early exits on trades like this where your conviction level has changed…
Occasionally you’ll find trades like this which don’t completely fail (stop you out), yet don’t work either (move to your targets). Instead, they just begin to stagnate and enter into a trading range where your funds are tied up. It can be a bit frustrating, simply because you’re left in limbo, wondering if the trade is in the process of failing or working. Each new red or green bar feels like the start of something meaningful, but they’re followed by the opposing color and you soon realize that price is simply showing indecision.
A key consideration to make when this happens is whether the character of the stock has changed. Stated otherwise, do you have a good reason to now lack conviction, or is it merely a mood shift for you?
A slow-moving trade is far different than one which may have just experienced an important technical event…
- Just because a trade isn’t developing quite as quickly as you would have wanted doesn’t mean it’s destined for failure.
- The stock may be building a new pattern which you simply haven’t identified yet.
- When I find myself in a trade which is starting to bore me, I know I’m overanalyzing when I start looking for signals which aren’t there.
- If I’m positioned in accordance with the overall market (ie: long in a market uptrend), and if my trading capacity isn’t restricted because of this position (I don’t need to free up capital), then what I need to do is stay with the trade until a technical reason prompts an exit. I likely need to stay patient, as this is still a trade which can pay me.
On the other hand, there are times when a premature exit may be warranted…
- When the stock has just seen a change in character as measured by a technical event (high-volume reversal, for example), an adjustment may be called for.
- If your trading funds are limited and you’d rather shift into a better idea, then you might consider closing out the trade in favor of another with more promise.
- When you find yourself positioned in opposition to the prevailing market trend (ie: long in a market downtrend), then you have grounds to at least lighten up. That can be done either by reducing your position while maintaining your original stop & target parameters for the trade, or by tightening both your risk and objective.
What else could help C. in this situation?
Trade Like a Bandit!
Jeff White
Producer of The Bandit Broadcast
Are you following me on Twitter yet?
Three Pillars of Risk Management
July 14, 2010 at 6:41 am
As a Seinfeld fan, I really enjoyed The Fatigues episode where Jerry dates a woman with a mentor. George needs to give a report on Risk Management, and passes off the task to Jerry’s girlfriend so she can read all about it and save George time.
But Costanza isn’t the only one who doesn’t fully understand Risk Management. In fact, far too many traders struggle with this very topic, and it keeps them from surviving and from succeeding.
So, let’s look at 3 pillars of risk management as a way to keep it simple. If you can nail these down, you should be alright.
Protect Capital
This is a biggie, no doubt about it. Simple on the surface, but not easy to put into practice.
As traders, our capital is what keeps us in business. Ignoring the consequences of mismanagement is a major mistake that’s not easily recovered from. Those who fail to understand the importance of first preserving what they have tend to place profits ahead of protection. That leads to the age-old error of eyeing new trades with only potential gains in mind, rather than placing equal importance on potential losses if the trade fails.
Capital comes in two forms…psychological capital and trading capital. Both must be protected with vigilance.
Psychological capital is the amount of inner strength, confidence, and willingness to take risks that a trader possesses. It can be eroded through many mistakes, and it’s not easy to replace. Protecting one’s confidence as a trader is paramount to staying in this game, because the trader who’s unwilling to pull the trigger when good opportunities come along won’t ever win.
Trading capital is what’s available in your account, and it’s of course the type of capital most are familiar with. Money can be more easier to replace than confidence, but it’s still critical to manage risk in such a way that your account stays intact. Traders who disregard the importance of keeping an adequate capital base find out quickly they’re unable to profit big enough to matter, even when they’re right. So, try to maintain account highs as often as possible, and you’ll find your account is growing on a regular basis.
Trade YOUR Proper Size
This one will vary for everyone, so the secret is to make sure you’re trading position sizes which allow you to be at your best. That means avoiding trades which mean too much, both psychologically and financially. Let’s look at those one at a time.
Psychologically, the ability to recover from a loss is something we all must ensure. Taking a big hit from a trade which didn’t work out leaves us vulnerable to anger or despair, and neither are beneficial to our trading. Anger promotes revenge trades, and that typically leads to digging a deeper hole than that which we may find ourselves in. Despair leaves us so focused on our emotions that we fail to recognize good opportunities when they come along.
Financially, we never want to be trading so large that we can’t recover from a loss. Taking a fairly large position when you’re confident is one thing, but dumping your entire account into a single idea is another. Consider the math behind poor trades, for example. A 20% loss in your account will require a 25% gain to get back to flat. And the deeper that loss gets, the more that’s required to make it up. Taking several smaller trades instead of one big one might require more management, but it can also greatly help to avoid one major disaster.
Exit When You Know You Should
This sounds really simple, and it is, but it’s the follow through which makes this one difficult for some. Making a trading plan is one thing, but sticking with it can be another issue entirely.
It’s all about discipline, and that isn’t going to change. You know at which point you’ve stayed too long in a position and the time has come to kick it to the curb. All of us know what it means to blow stops, and most likely, it doesn’t pay off when we do. That’s a self-inflicted mistake that can be avoided, provided some measures are taken to help automate the process.
Here’s the thing…defined risks are the best kind. Pick your exit at the same time you select your entry, and commit to it. If you struggle with that, set a stop order the moment you’re filled on your entry, and then you won’t have to make a decision under the gun. If you get stopped, you most likely just saved yourself some additional pain. But you’ll be managing your risk effectively and reinforcing discipline even when you’re wrong.
If you’ll protect your capital, trade your proper size, and get out when you know it’s time, you’ll be doing 3 of the things the most successful traders focus on. How can there be any downside to that?
Trade Like a Bandit!
Jeff White
Swing Trading & Day Trading Service
www.TheStockBandit.com
Are you following me on Twitter yet?
Prepare for Anything
January 21, 2010 at 7:00 am
On several occasions in recent years, I’ve taken a spring trip with my dad and some friends to Arizona to play golf for a few days. I love the desert, and it’s fun to spend some time with the guys and make a few birdies (let’s not talk about the bogeys!).
Around Scottsdale, and particularly to the north of town, it’s quite common to see single-engine planes buzzing around the skies. Maybe it’s the great weather and silence of being on the golf course that made me notice them, but they seem to be everywhere. They’re pilots in training, and they’re starting small before they work their way up to something larger (like perhaps, something with more than 1 engine!). I respect that approach, and we’ll touch on that shortly.
But one thing that really caught my attention is that they actually shut off their engines – on purpose – over and over. What? It’s one thing to hop in that little thing with what sounds like a lawnmower motor on it, but hey, it’s no glider. Why would they do this intentionally?
They’re creating stall conditions and learning to recover. Learning to purposely manage a malfunction in a controlled environment (well, partially) helps them avoid panic should it ever happen unannounced. Eventually, they’ll become the kind of pilot I wouldn’t mind flying with.
From One Cockpit to Another
As a trader, sometimes that malfunction happens without warning. Sometimes right after an entry is made, the position rips right against you, perhaps even before you’ve had time to place a stop. Sometimes it’s an overnight trade which has unexpected or unscheduled news hit which causes the stock to gap against you, perhaps even beyond where you had intended to exit in the event of a failed trade. It’s painful and shocking, and more often than not, it results in panic for the untrained trader.
So how do you deal?
It’s almost impossible to mimic the emotions that go along with such a situation, but here are a few simple things you and I can do in order to avoid panic.
1. Expect it to happen. That doesn’t make us negative thinkers, mind you, but rather traders who are mentally prepared for anything – including the worst-case scenario. After all, if we’re prepared to face the worst, what could possibly cause us to panic? The point here is that through logical thinking as well as visualization, unexpected events and adverse moves can be mentally rehearsed to the point that when it does happen, we’re focused on the solution rather than the problem.
2. Keep a level head. By doing #1, we’re freed up to maintain our wits. Throwing a temper tantrum or freezing up entirely is only going to make it worse. The deer in the headlights stands motionless (at least here in south Texas), which means it’s up to the car to change course if something awful is to be avoided. Don’t be the deer – you can’t base your protection on hope that the stock will change course for you. Cooler heads will always prevail, so exercise self-control when you find yourself in a sticky situation and your mind will be available to strategize.
3. Expect to survive. Trusting that you’ll be alright in the long haul will help keep things in perspective, just as they should be. What might feel like a catastrophe to the inexperienced trader might be a little unsettling to you, which is something you can absolutely recover from. At the worst, it’s one bad trade out of your next 1000 trades, so consider it a spot on the windshield to look beyond rather than something worthy of doing more damage to you than it already has.
4. Never allow one trade to be too important. This of course takes into account position sizing and position risk, because the financial hit is the one that comes first. Putting on trades which are larger than they should be is nice when they work, but when they don’t, look out. Staring at a loss which is bigger than you’ve faced before will bring instant regret. Similarly, trading within one’s limits also means that no trade is ever emotionally too important. The aftermath which follows a big loss can be more emotional than financial, so walk the line carefully when choosing position size, and you’ll avoid a tailspin.
The market will dish out surprises from time to time, no doubt about it. Train yourself to expect it, and mentally rehearse some ways you’ll respond when it happens. You’ll ultimately feel as though you’ve been there, and your second reaction (following ‘oops’) will be a remedy rather than crippling anxiety and fear.
Trade Like a Bandit!
Jeff White
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