Thursday, April 22, 2010

DLLR, CELM, & MSPD

I got triggered in and I am now long the three set ups I highlighted on my blog last night. I got filled 216 MSPD @ $8.69, 432 CELM @ $8.00 and 144 DLLR @ $27.75. My stops are at $8.20, $7.75 and $25.00 respectively.

On another note, I came across two interesting articles this morning while doing my usual reading on the net.

One of them was an article @ http://markminerviniblog.blogspot.com/2010/04/winning-losers-game_21.html. This was essentially what I was trying to say in my blog post "Back on Track!". Focusing on executing the process of trading as efficiently as possible instead on the profits.

The second article was one on risk management and the concept of "R" on www.trader-mike.net . The article made me realise that I have been using the term "R" without defining what it is and what my "R" is. So I will take the opportunity to do so now.

I employ the percent risk model that Van Tharp speaks about in his book "Trade your way to financial freedom". He defines "R" as the % of your equity that you are planning to risk on each trade you take. I am not going to go through an extensive explanation here. If you want to get a further detailed explanation visit the site I mentioned above and look for the article R multiples defined or read the book.

What I want to do here is to define my R size. My R is 2% of my equity. So when ever I say that I lossed 2R on a trade, I am simply saying that I lost 4%. Ideally I like to keep my losses at around 1 R (2% loss on equity) and take gains at 3R+ (6% gain or more on equity). So that even when I am running at 30% winners to 70% losers I still come out on top.

An example of this was my summary of the trades I took in January. In this month I lossed money on 91.7% of my trades but still ended up profitable for the month because I let my single winner run and yeilded over 9R (a gain of over 18% on equity) but kept losses well under 1R with the exception of two trades which were 1.35R and 1.4R losses.

Another concept that is even more rarely discussed is the concept of "portfolio heat". This as I understand it is the sum total of all the risk exposure you have across all your positions. So if you have three open positions and you are risking 1R on each trade. Then your portfolio heat will be 3R or in my case 6% (3 x 2%). I try to keep my portfolio heat at or about 6%. So I rarely have three or more open positions except if I am risking less than one R one each position. For instance, if I wanted to go long in a primary beark market. I might decide to risk 1/2R on each position instead of a whole R. So in this instance I would have 6 open positions and my portfolio heat would not exceed 6% since 6 x 1/2 x 2% = 6%.

So after this explanation I hope that my use of the term "R" and "portfolio heat" or just "heat" are clearly understood in future.

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