How much to allocate to one trade??

heavenskrow

heavenskrow

I know this question has been asked so many times, but I have not found a single good answer searching through the threads.

When I first started trading/investing in college, I only had a $2000 capital.
I did not understand the concept of mimicking what an institutional portfolio does with $2000....no point, commission alone would eat up a large % if I were to buy 500+ stocks.
Thus, I would either be 100% in a position or 50%/50%.

Now after graduating college, I have a larger "serious" amount of capital to manage. I obviously cannot be allocating 100% like I used to back then.
However the amount of capital I am managing is still not large enough to mimic mutual funds who on their largest position is at most 3%...and the rest of the positions are like .4%,.1%,.05% of the entire portfolio with let's say 1000+ positions.

So is there some magical formula that determines % weights based on strength/portfolio size??? Or is risk management about allocating a certain % on a trade based on a stop loss you are comfortable with losing????

Thanks in advance :confused::p
 
Years ago, I had a $250,000 account. Went hunting one day and came back $24,000 poorer from just trading simple closed end funds. So does that tell you anything about what the risks are and what you feel like you can afford to loose.

Been day trading ever since.
 
1. Calculate how much risk you want to take , say 0.5%, 1%, 10% whatever of your portfolio.
2. Find the point or range where you will be wrong. You will be putting your stop loss there (mental or actual)
3. Find the point of entry where you will be entering the position.
4. Calculate the distance between (2) and (3).
5. (1) divided by (4) (together with some fiddling to adjust for contract sizes etc) gives you how many shares or contracts or whatever you need to do
6. Check you are not leveraging up like a mad man.

This is just one very basic way of calculating position size, just to give you an idea.
 
Visaria said:
1. Calculate how much risk you want to take , say 0.5%, 1%, 10% whatever of your portfolio.
2. Find the point or range where you will be wrong. You will be putting your stop loss there (mental or actual)
3. Find the point of entry where you will be entering the position.
4. Calculate the distance between (2) and (3).
5. (1) divided by (4) (together with some fiddling to adjust for contract sizes etc) gives you how many shares or contracts or whatever you need to do
6. Check you are not leveraging up like a mad man.

This is just one very basic way of calculating position size, just to give you an idea.
More...

Thank you sir.
I have come up with a related risk/reward ratio on Excel and will dabble with this in my current setup to see if there is any improvement/difference.

While looking through past threads in risk management, I have come across Optimal F and Keller? Also heard to risk 10% and then have a stop at 10-20% of that 10% risk which equates to a 1-2% risk of the entire portfolio. Pretty interesting and I have taken this approach starting today, but will play around with your wisdom.
Cheers
 
  1. Do a simulation of your system on a few hundred trades
  2. Write down for each trade what your result was, but also max and min P&L . OPEN P&L!
  3. Put everything in excel
  4. Calculate the optimal stop by raising your stop from 0 to x ticks and run simulation again
  5. Check for each stop level what the return was and what the max OPEN drawdown was

Put the stop there where you find the drawdown acceptable for you.
 
"Soros has taught me that when you have tremendous conviction on a trade, you have to go for the jugular. It takes courage to be a pig ... As far as Soros is concerned, when you're right on something, you can't own enough."

Do you think Soros actually adopted risk management rules all the time or did he sometimes break it on something he felt very strongly about??
 
Breaks it...they all do , Buffett stuck 40% of his portfolio into one stock at one point.

Jim Rogers said when he was working with Soros, they were leveraged to the hilt on everything.
 
Visaria said:
Breaks it...they all do , Buffett stuck 40% of his portfolio into one stock at one point.

Jim Rogers said when he was working with Soros, they were leveraged to the hilt on everything.
More...

see this is what has been on my mind.
there is no way traders have averaged annually 100% for 8 years
only allocating 2%~ a trade.

i'm feeling like I should just take 2% risks on average trades....but then when you see a huge opportunity/your gut is telling you its a homerun, you go for the homerun..... and become a pig....
 
The way to attain truly superior long-term returns is to grind it out until you’re up 30 or 40 percent, and then if you have the conviction, go for a 100 percent year. If you can put together a few near-100 percent years and avoid down years, then you can achieve really outstanding long-term returns.

- Stanley Druckenmiller, New Market Wizards
 
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