Monday, January 17, 2011

Missed opportunities....

One of the biggest problems that traders face is that of choosing what to trade when faced with many different opportunities all of which fit your criteria for a high probability set up. Now many traders including myself use the percent of equity model to size positions. With this approach you can be long on full margin and be in only one or two positions!

If you have a strategy where set ups are few and far between then thats alright. However, with a strategy such as mine when there are often numerous setups triggering daily especially under current market conditions you can find your buying power tied up in one or two positions that are going no where while others that you would have taken if you had additional buying are exploding.

So after deep thought and reflection on my past trading and looking at the approach of other traders like Cameron Fous in particular I am thinking about spliting my buying power into four parts. There are three major factors contributing to this.

Firstly, I know from my past trading that I rarely ever have more than four high probability set ups trigger in the same week and my trades rarely ever last more than four to five days. So this should keep me sufficiently liquid on a daily basis such that I do not miss any major opportunities.

The second reason relates to risk. I rarely ever place stops more than 10% from entry. In the event that I do have a 10% stop then I would not be risking more than 2.5% of my account the trade. Most often my stops are around 5% from entry. So my risk per trade will be around 1.25%. With this I am extremely comfortable.

Thirdly, I will already know before hand how much buying power I will commit and this will allow me to calculate share size more quickly. This is especially critical when fast decision making is necessary like buying intra day break outs at price levels not planned for etc.

I plan to email a few of the more prominent traders and ask them how they determine position size before I make my final decision. However, once I have made a decision I plan to stick with it for at least 6 months.

Hope you find this useful.

Good luck with your own trading!

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