Quote from Gravestone Doji:
To properly size a trade, you would subtract the entry price from the stop loss price and divide that amount into what ever value 2% of your account is, thus telling you how many shares to buy. But what's an efficient way to go about adjusting the formula to adapt it to the current market environment which takes into account the historically high volatility and likely occurrence of overnight gaps if you want to swing trade?
The post above is a correct way to do it, assuming no gaps. However, it show only the last variable to decide on. You still have to decide on the other variables, and the order in which to decide.
As mention one needs to dead with gaps. How to deal with gaps:
1. Avoid them: Trade indices, do not hold over weekend, and have a futures trading account if you trade cash so that you can implement a stop via futures.
2. Use the stop that never fails (options).
There is a process to follow in deciding on all variables in a rigorous manner. I interact with some folks, and I noticed that they have many flaws in setting up all these variables, and why they should do what they should do.
Instead of repeating it, I decide to write up in a report, and give it to them. It made even my own trading stronger.
There is so many subtle pitfall that if you do not know what you should do, in which sequence, and most importantly why, you will not be able to build a strong trading engine.
PS: Some people may think that options can be expensive. They can but you would be surprised to discover that stops can actually be much more expensive than options. Do you know why?
