When to diversify winners?

[Smart Money]

Hey Guys...it's been a while!

I have a question for the group. I'm swing trading. And I'm having good success playing three positions that have good momentum. If I see problems starting to develop in one of my positions, I jump out of that faltering position and into something else that looks promising. So far, it seems to be working...seems like on any given day, two of the three positions do well enough to counter the random slow days on the third stock.

So my question is this. Given that additional positions would add diversity, at one point do I stop playing three positions and start playing four? So far what I'm doing is working, but I think 3 positions is a little bit too focused.

Recommendations?

Thanks,

SM

 

[Scataphagos]

There is merit in trying to play "relative strength/rotation". Exactly how to best go about it... subjective. IOW... nobody is going to give you advice on this as they don't know either.... nobody does. It's all a "best guess" play.

Good luck.

 

[longandshort]

What’s your time horizon?
You should have drivers for your view on any stock that will help you establish a view. Once the view changes, exit.

Diversification needs to reduce correlation. Can be done with 5-15 stocks if you watch portfolio covariance and correlations closely.

 

[Smart Money]

What’s your time horizon?
You should have drivers for your view on any stock that will help you establish a view. Once the view changes, exit.

Diversification needs to reduce correlation. Can be done with 5-15 stocks if you watch portfolio covariance and correlations closely.

Thanks. Part of the method is to exit whenever the view changes, regardless of the degree of diversification, so I'm quick to get out. I do try to diversify as much as possible where I can, but if 2 of my 3 stocks are close to the same sector, I feel the risk is tolerable as long as I set stops and I'm ready to run from the forest at the first sign of smoke.

Your mention of 5 to 15 stocks give me pause. That tells me I don't have enough diversification yet. So I'll try to split into 4 or 5 holdings sooner rather than later.

Thanks,

 

[longandshort]

Thanks. Part of the method is to exit whenever the view changes, regardless of the degree of diversification, so I'm quick to get out. I do try to diversify as much as possible where I can, but if 2 of my 3 stocks are close to the same sector, I feel the risk is tolerable as long as I set stops and I'm ready to run from the forest at the first sign of smoke.

Your mention of 5 to 15 stocks give me pause. That tells me I don't have enough diversification yet. So I'll try to split into 4 or 5 holdings sooner rather than later.

Thanks,

I recommend diversifying across themes. E.g. you may have a long housing market trade, a short oil trade, and such.

 

[deaddog]

How much of your portfolio are you risking on each position? If you are comfortable with the risk there is no need to diversify.

 

[Smart Money]

How much of your portfolio are you risking on each position? If you are comfortable with the risk there is no need to diversify.

I’m just holding three stocks. So I guess technically the loss would be whatever gap down could catch me by surprise, or my stop. I’m not using leverage at all. I’m just trying to make 1/2% per day on average.

 

[deaddog]

I’m just holding three stocks. So I guess technically the loss would be whatever gap down could catch me by surprise, or my stop. I’m not using leverage at all. I’m just trying to make 1/2% per day on average.

That still doesn't tell me what % of your capital you have at risk.

It depends on size of your risk; the location of your stops; the risk reward you are looking for.

In my case I risk 1.5 to 2 % of my capital per trade.
I look for a better than 1 to 2 risk to reward.
My optimum target is 18% gain or a 7% loss
This means the maximum positions I can hold is 5.

 

[Smart Money]

Sorry, I thought I was clear...I’m playing an entire “play” account. I have taken the entire account and broken it into thirds and each third is fully invested in stocks. I set a deep stop for a black swan type event but it’s a swing trade so it doesn’t trigger.

My biggest risk is buying the stock and then having it IMMEDIATELY backtrack until my sell signal is triggered. If I had to guess that would result in a 5% loss...possibly less depending on how well I enter. But typically the position runs a while before that happens. I don’t have a profit target. I just let the position run until it tells me to sell.

While this may sound simplistic and arbitrary I assure you that quite a bit of screening is involved. The devil is in the details.

 

[deaddog]

If your stop is 5% away from your entry price and you have 3 positions you are risking about 1.5% of your capital per trade.

Diversifying hides your mistakes. You diversify so that your winners offset your losers. If you are taking losses quickly and letting your winners run you don't need diversification.