Multiple Trades and 2% rule

[mintywang]

Hi Guys,

A newbie here, just got involved trading a few mths back n trying to understand money management - Got a question regarding implementing the 2% rule when holding onto several trades. From what i read on the 2% risk rule, if my entire account is 10K, then my risk amount would be 200. So if a stock is trading at $20 and my stop loss is $19.50, then i should be buying 400 stocks. So my expense for that trade (exclude commissions) is $20x400 = $8000.
But this means I can only make 1 trade each time (since $2K left is unlikely to get me anything and my account is unmarginalized). I believe this slows down my trading as I'm the type who has 3-5 trades open at any point of time. So those who have many trades open at any point of time, how do you manage this risk rule?

Many thanks..
MW

 

[timsk]

Hi MW,
Welcome to T2W,

Your analysis is correct and you've pretty much answered your own question. Most people here trade on margin for exactly the reason you outline. Most brokers offer margin in the region of 4:1 for stocks - and a lot more for spread betting, forex and CFDs etc.

With a broker who offers 4:1 margin, you could have 4 such trades - and nominally 5 - putting at risk a total of 8-10% of your $10k account (assuming a maximum risk of 2% per trade). However, be under no illusion that using margin and trading multiple positions adds significantly to your market exposure and, therefore, the overall risk. If you're swing trading overnight and there's a 'black swan' event, all your trades could be seriously offside having blown through your stops without triggering them. You can mitigate this to some extent by having a mix of long and short positions - but it's still more risky than trading the way you're doing at the moment.
Tim.

 

[NVP]

And market correlation is the key here..........

Generally (and i say generally) if you are trading multiple be sure you know the correlation of the markets to ensure you are not just doubling trades/risk on very similar trends or market patterns

eg

USD and Yen generally move in the same direction
EURO,GBP,AUD,NZD generally run together (watch the timezone variations though)
CAD can swing both ways
and CHF is the Euro's permanent shadow at the moment....

and then you have correlation with other markets as well........regarding the Stocks you are picking try to assess the correlation of sector and industry with the multiple trades and also keep an eye on the particular Index where your particular stocks are as well.......

for example would you trade a falling stock where the sector or index is rising ?

but we digress......

N

 

[mintywang]

Hi Tim,

Now i understand how hving a margin acct helps. But i don't like the concept of so-called using money that doesn''t belong to me. Because as you said, while it allows me to trade more at any point in time than an unmargin acct, loses can be substantial in a black swan event. Thanks for the info. But to be able to hv 3-5 trades at a point, sounds like the only way is to focus on stocks of lesser price.

Thanks again Tim!

 

[mintywang]

Hi NVP,

No man, that was v. good stuff you mentioned. I'm into stocks for now as that was what i started off cos i think the rules to the game are relatively more straightforward than other instruments although stocks may require more research and work because as u mention, needing to find out the direction of the sector, general market, news/earnings annoucements of that stock. Furthermore, i hv trade setups that scan all stocks so it can pick up any stock from any sector and almost each time i'm picking up something new.

i;ve tried to maintain a watchlist of stocks that's a mixture of good-rated stocks (so i buy when stocks from this list when i see a setup i'm familiar), bad-rated stocks (for shorting), etc. but this method doesn't seem to work because i'm familiar with only a certain set of setups that don't appear too often. So by limiting to this list of watchlist, i don't get many buy/sell signals.

But in anycase, am thinking of other instruments in future once i've refined my techniques and money management skills.

MW

 

[timsk]

But to be able to hv 3-5 trades at a point, sounds like the only way is to focus on stocks of lesser price.

Hi MW,
That's one solution, yes. However, take care when trading lower priced stocks as they can be problematic in themselves.

Movement & Volatility
Look at the daily / weekly movement of a $5.00 stock and compare it to a $50.00 one. If they both move 5% in a week say, that's $0.25 on the cheap one and $2.50 on the expensive one. The cheap one may not present the trading opportunities that the expensive one does.
Liquidity
Some (but by no means all) cheaper stocks can be fairly illiquid. Therefore, getting in and out - at or near the price you want - could prove to be tricky. Keep an eye on volume and only trade liquid stocks.
Expenses
As you say, to get the same bang for your buck, you'll have to trade lots of cheap stocks instead of just one or two more expensive ones. That's 3-4 times the number of spreads and commissions - so your expenses are liable to increase. Also, keep in mind that a $0.05 cent spread on a $50.00 stock that moves $2.50 in a week represents much better value than the same spread on a $5.00 stock that only moves $0.25 cents a week. With the latter, 20% of your potential profit is lost in the spread.

Just a few things to keep in mind - good luck with it.
Tim.

 

[mintywang]

Hi Tim,

Yea, good points there I definitely agree with you. Hope I can find my balance and what suits me best soon! Thanks very much for the invaluable advice. :>

MW

 

[rick88]

Risk of 2% was intended to mean "portfolio heat risk" by those who invented it. This means that your total risk should not exceed this number. You either trade then lower priced stocks or increase your account equity. Anyway, 10K is just a practice account size nowadays. If you want to tarde for a living you must have 100K or twice as much.

 

[chocabloc]

Risk of 2% was intended to mean "portfolio heat risk" by those who invented it. This means that your total risk should not exceed this number. You either trade then lower priced stocks or increase your account equity. Anyway, 10K is just a practice account size nowadays. If you want to tarde for a living you must have 100K or twice as much.

Nonsense