Rookie Question on Sizing, Etc

K

Kirribilli

Ok, I have 20K in a margin account. I short an ETF @ $20. My margin is $2,000 (at IB). If I want to keep this trade to 2% of my account that is $400 I place @ risk, right? Does that mean, I cannot do the trade because it requires more than $400, or I stop or take a loss at $400?

And as for the 6% rule, does this mean, if the later in the preceding paragraph is true, that I can make numerous trades like this, but not the same one, as long as I close out @ a $400 loss and stop trading for a month if I lose three trades or $1200 in a month?

Thanks in advance for your patience.
 
2000 is your cost. In you're scenario 400 is what you want to risk; so if you're down 400 get out.

No idea what the 6% rule is.
 
Kirribilli said:
If I want to keep this trade to 2% of my account that is $400 I place @ risk, right?
More...

wrong

risk measured not only in amount of the acceptable possible loss(es) (per trade or per series of trades), but also in the acceptable probability of this loss(es) happening, based on (you continue :) )... based on the method :)

do you have that method?

no ----> stop trading real money
 
I am short stock with two protective calls, delta hedged at 1 each day. So my max loss is the cost of the calls weekly, about 50 or 2.5 percent of the 2000 margined. So, I'm close enough, I figure, by that measure, too. Thanks for letting me look at it another way.
 
2rosy said:
2000 is your cost. In you're scenario 400 is what you want to risk; so if you're down 400 get out.

No idea what the 6% rule is.
More...

I thought the rule was 2% per trade per month max loss and 6% per account per month.
 
So, to go back to the 6% question, can I make only three trades in my account or a bunch and if I hit six percent say with six 1 percent losses I have to close.

Also is this per account or per portfolio? I run about six accounts with different instruments and goals and tax status.
 
I never heard of a 6% rule.

Question: How many years did you back test this method?
What was drawdowns based on weekly, monthly, and yearly before new equity highs were made?
Was the back testing done with or without option hedging? If done with hedging, was back testing done with same option distance to price, either ITM, ATM or OTM.
What was the "mean" loss on losing trades?
Are you long term or swing trading?
What is the "mean" of option holding? (Length of keeping the hedge on).

The main problem I see about you trading is if you have questions, you should not be trading real money. You need well back tested method, so if one of the more experienced traders ask you questions, you have the answer in your Trading Plan, you don't want to be testing while in a trade.

Good luck.
 
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