Risk Management.

At a Glance

Balancing Risk

For an individual trade the available Dollars = Portfolio Size in $ / number of desired concurrent positions. This is designed to balance risk across all positions in your portfolio. (Please review Portfolio Strategy first.) The trade size in dollars may be less than this and depends on your risk tolerance and recent stock price variability.

Trade Size

The technical risk on long trades is determined as the difference between the computed entry stop-limit price and the computed exit stop-loss price. To illustrate, below is an example where the desired portfolio risk has been used to compute the trade size in shares.
Given the account parameters above, the portfolio risk is 2% of $100,000 which is $2,000 and we can have up to 10 stocks in play. So we have up to $10,000 available for each trade. The actual portion put into each trade; however, is constrained by the dollar risk amount of $2,000 total risk / 10 positions = $200. A decision is made to buy a $40 stock and Stocksaurus has computed a $2 difference between the Entry stop-limit price and the Exit stop-loss price. The maximum position size for this trade would be calculated as follows: Note:
The risk adjusted position size is determined by the buy-stop limit and sell-stop prices which are computed based on the recent statistical behavior of stock price. Smaller ranges between these two prices allows for less dollar risk and therefore a higher number of shares to be purchased. However, you should always be aware of pending news or company events (such as earnings or dividends) which could impact near term price range.

Recommended practices to reduce risk

  1. Choose the number of shares so that the (Buy Stop Limit Price – Stop Loss Price) * number of traded shares = your trade risk $ amount.
  2. Use a Buy Stop Limit = the buy stop order price. This price will be in the direction of the anticipated move. The order should be good only for the current or next day.
  3. Stop Loss - Set a stop loss or market stop order immediately after a buy stop limit order is executed. Your trading platform may allow use of bracket orders to automate this process.
  4. Break Even = Raise your Stop loss price to your purchase price (normally the buy-stop limit) as soon as the stock trading price reaches the break-even price.
  5. Avoid holding a company's stock through its earnings report when swing trading.