Moneymanagement
Hi,
as promised, I would like to make some comments on Moneymagement today. Most of these ideas I adapted from van Tharp, so, it´s not my own system. But, it works quite well. I call it the 2%-6%-rule. This is how it works:
Assume you have a starting capital of 10.000$ (it works with any amount!). Then, you should not risk more than 2% of your total capital in one single trade. In our example, you shouldn´t risk more than 200$ per trade. Not much, right? - Ok, but the idea behind this system is to get out of losses quickly and to let profits run. Which means, we will have a tight SL. My idea is to have your SL in mind before you enter a trade. The method to determine the SL is up to you. Personally I work with the PivotPoints. I usually place the SL slightly below the expected PivotLowPoint. Once you have your SL, you can calculate the maximum amount of stocks oyu an buy. Let´s look at one example:
The stock of company greedy is currently at 12.50$. The expected PivotLowPoint would be at 12.20$. Hence the difference is equal to 0.30$. Now we divide the 200$ by 0.30$:
200$/0.30$=666.67 (oh, the number of the beast... upps...) - which means, you could buy 666 stocks of company greedy. Or, to round it, 650 stocks. (Which would be equal to 8125$.) - Nowyou can already see, that by changing the SL, you will either increase or decrease the amount of stocks. Let´s say you would put your SL at 11$. Then the amount of stocks to buy would be 200$/1.50$=133.33 - around 130 stocks only. Got it?
Well, that wasn´t to hard, was it? - But hey, let´s add another rule. The R-multiples idea. Your trade should have a reward to risk ratio that is greater or equal to 2. This means you should enter a trade when you are sure that the possible gain is twice (or more) the amount of the possible loss. In the first example above, it should therefore be at least a 0.60$ possible gain. The difference between the actual quote and the SL (here: 0.30$) is called "R". So, the possible gain should always be a multiple-R! You will not always achieve exactly 2 or more - everything above 1 is fine. Why? Because you are cutting your losses at 1R - so, the gain should be more than 1R.
That is basically the idea - for more details, you should read van Tharp, find more here: Van Tharp Institute.
Good luck to all of you,
The Stockinvestigator
as promised, I would like to make some comments on Moneymagement today. Most of these ideas I adapted from van Tharp, so, it´s not my own system. But, it works quite well. I call it the 2%-6%-rule. This is how it works:
Assume you have a starting capital of 10.000$ (it works with any amount!). Then, you should not risk more than 2% of your total capital in one single trade. In our example, you shouldn´t risk more than 200$ per trade. Not much, right? - Ok, but the idea behind this system is to get out of losses quickly and to let profits run. Which means, we will have a tight SL. My idea is to have your SL in mind before you enter a trade. The method to determine the SL is up to you. Personally I work with the PivotPoints. I usually place the SL slightly below the expected PivotLowPoint. Once you have your SL, you can calculate the maximum amount of stocks oyu an buy. Let´s look at one example:
The stock of company greedy is currently at 12.50$. The expected PivotLowPoint would be at 12.20$. Hence the difference is equal to 0.30$. Now we divide the 200$ by 0.30$:
200$/0.30$=666.67 (oh, the number of the beast... upps...) - which means, you could buy 666 stocks of company greedy. Or, to round it, 650 stocks. (Which would be equal to 8125$.) - Nowyou can already see, that by changing the SL, you will either increase or decrease the amount of stocks. Let´s say you would put your SL at 11$. Then the amount of stocks to buy would be 200$/1.50$=133.33 - around 130 stocks only. Got it?
Well, that wasn´t to hard, was it? - But hey, let´s add another rule. The R-multiples idea. Your trade should have a reward to risk ratio that is greater or equal to 2. This means you should enter a trade when you are sure that the possible gain is twice (or more) the amount of the possible loss. In the first example above, it should therefore be at least a 0.60$ possible gain. The difference between the actual quote and the SL (here: 0.30$) is called "R". So, the possible gain should always be a multiple-R! You will not always achieve exactly 2 or more - everything above 1 is fine. Why? Because you are cutting your losses at 1R - so, the gain should be more than 1R.
That is basically the idea - for more details, you should read van Tharp, find more here: Van Tharp Institute.
Good luck to all of you,
The Stockinvestigator
posted by The Stockinvestigator at 11:28 AM
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