Calculating Risk

[N54_Fan]

Quote from Random.Capital:

What happens when a liquidity hole opens up and it gaps way way past the stop?

Or more exactly - how does that risk get quantified and factored into the OP's original question?

I already explained it in the other thread by the same OP with the same topic. Basically you figure your % risk you want to accept per trade. In a $100K acct lets say that is 1%...so $1000.

If for example the stock you are buying is $100 and you decide your stop loss is at $98. There is a $2 difference per share. That is your RISK PER SHARE. You then are "allowed" to buy 500 shares max for a total RISK PER TRADE.

However, as you mentioned price could gap down to $92 for a $4000 loss. Luckily this should not happen often. This is more common in highly volatile stocks and stocks priced under $10. The other thing to consider is that if it is a thinly traded stock then you could gap down simply because there are a lack of enough buyers for you to sell to when you want to liquidate your position.

There are a few things you can do to HELP prevent this RISK of gap losses. 1) adjust stops wider for more volatile stocks. 2) only buy stocks or ETFs > $10 or so. 3) Only trade stocks or ETFs that are traded at least 1,000,000 shares a day. The other thing I do is only trade a MAX number of shares that can be liquidated in 30 sec or less. To figure this I know there are 780 30 sec time periods in a trading day of 6.5 hrs. So I will only trade a maximum of the average vol of shares/780. If average volume of shares traded in a day is 390,000 then I will only allow myself a MAX of 500 shares to trade in that stock/ETF.

These rules will NOT work all the times and you will get caught with gap losses past your stop loss at some point. The only other thing you can do is limit this damage by risking less per trade as I described above (1% or less is a good rule of thumb until you have data of about 100-300 trades to STATISTICALLY determine you optimal risk to meet your goals).

Realize that nothing is life is 100%. Gap losers is just something that has to be factored in to your R (risk), Expectancy of your system, and Position Sizing of your system. Your best option is to combine all of the rules I have described above and if you think you would risk 1% on a trade risk more like 0.8% instead and you should be fine.

Good Luck

 

[N54_Fan]

Quote from SnakeEYE:

september 22,was a good example,among others.the only risk you take if you put yourself at risk by wrong position sizing.

OK,...please help me understand where you would have sold on this day given that the market opened up down big and remained down big all day. Would you have shorted at the open? Are you only day trading? If not then you have lost $$,...seems like a risk to me. If you day traded that day where did you enter and where was your stop? If you say you dont use stops then I am not interested in learning this "no risk" idea.

I have included the 60 min chart of SPY on that day.

 

[SnakeEYE]

Quote from N54_Fan:

OK,...please help me understand where you would have sold on this day given that the market opened up down big and remained down big all day. Would you have shorted at the open? Are you only day trading? If not then you have lost $$,...seems like a risk to me. If you day traded that day where did you enter and where was your stop? If you say you dont use stops then I am not interested in learning this "no risk" idea.

I have included the 60 min chart of SPY on that day.

you should`ve shorted prior to 9-22 at any time the volume started to drop.it was the event driven trade.check what 22 was about and don`t tell anyone.

 

[N54_Fan]

Quote from SnakeEYE:

you should`ve shorted prior to 9-22 at any time the volume started to drop.it was the event driven trade.check what 22 was about and don`t tell anyone.

As a matter of fact I did short prior to 9-22-11, but because of my TA indicators.

I still do not see how this is a "no risk trade". Anytime you trade you are trading the right edge of the chart and do not have the benefit of hindsight. So how does your system tell you there is no risk on 9-21-11?

 

[TradetoWin]

It will be simple. You can decide how much percent you are willing to risk and then multiply that to your trading capital. The higher the percent, the more risk you would like to take.

The number of shares you will buy depends on the amount of risk you would like to take as well as the money management stop.

You can read the Risk management in stock trading tutorial for details.

 

[Broch]

As a proxy for an instrument to determine position-sizing risk first, measure to what extent prices rise or fall breaking out of parabolic sar, average true range, standard deviation, sharpe ratio, variance at risk and spreads. The more the better. Conglomerate statistical ratios of better than 70% should be considered. Then fine tune hit rates to profit targets.

3 times the 10 Day ATR; 2 times the 28 day ATR; 2.5 times the 35 minute average; the sar velocity rate of .02%, &c. How were they derived and why were they considered best as a general proxy? Is what you should be asking yourself, as opposed to blindly following. More times than not, anything offered by those not willing to pay it forward as opposed to sell you forward are selling 15% of a system that if reverse engineered won't satisfy reason at all. One's maniacal, incessant and exploitative need to be considered an authority needn't have anything at all to do with 1) your capital, or 2) preserving your capital.