I’ve received a number of questions recently about my money management strategy and although I’ve posted articles on this before I thought a quick post summarizing my strategy and how that relates to my profits would be useful.
My trading account (The AtticFund) is a £10k fund. I call this £10k my Base Equity @ Risk (BE@R). This is the starting point when I calculate how much risk I am prepared to take on each trade that I make. I also use my BE@R figure to calculate my P&L.
RULE #1
I risk a maximum of 2% per trade - The AtticFund now stands at £11k, which means 2% = £220. So for every trade that I make I set an ‘emergency stop’ at £220.
- My ‘emergency stop’ is there to protect against an event that causes my trade to go against me big time (think 9-11 for example)
- If I am in a long trade and my nightly analysis signals that the stock is now a sell, then I will sell before my ‘emergency stop’ is hit
- If I am in a long trade and my nightly analysis signals that the stock is neutral, then I will hold onto the stock until it either hits my ‘emergency stop’ or becomes a sell.
RULE #2
I will only risk a total of 6% of my account at any one time. At the simplest level, this means 3 open positions all with 2% ‘emergency stops’ in place. I will never expose more than 6% at any one time
RULE #3
I never move a stop further from the stocks price. I may from time to time tighten a stop, if I am in profit and the stock looks like it may turn – This is done at my discretion
RULE #4
I will never enter a trade with a Risk:Reward ratio less than 1:1. My ideal trade would have a reward of at least 1.5 the risk
RULE #5
If my account size does not allow me to place a Stop within 2%, then I will not place the trade
Most trading newbies make the same mistake of over-trading – I know of traders that have risked over 50% of their account on single positions! This is a cardinal sin and although may yield some great profits in the short term is a sure fire road to ruin.
Most pro traders will risk less than 1% on any position - for the likes of you and I the returns on a trade with that risk profile is probably too small to make it worthwhile and there are times when I’ve considered increasing the amount I am prepared to risk on each trade. But I feel comfortable with 2% irrespective of the size of the account and understanding your own trading psychology and pain points is an important part of the journey that we undertake as traders.
Rule 1 : This is a very conservative strategy, tight stop losses on physical securities not CFD’s, options or futures are expensive. One is simply stopped out only to enter in two days later with a mini loss on their hands.
For consideration, try shorting the position once a virtual stop loss line (a place where correction has occured) has been entered, leave the position above (a virtual hedge point) and as the stock drops one profits on the fall. Then as it reverses pull the short off and go back in with a double average position.
Recently I traded Alcoa, it fell down 2.5% only to eventually recover past my original entry position and up 3.0% from that point, the entire move was tracked down and up and, it was very profitable without leverage.
Hi Martin,
Thanks for the comment. I agree that 2% on a physical is probably too tight and does not allow for the natural oscillation that a stock undergoes. I spread bet and will work out where I should place a stop based on lines of Support & Resistance, then I work out what my position size should be in order to only risk 2%.
I have considered your suggestion of effectively hedging a position on the way down, but my issues with this is; “If I think the stock is a good long bet, then why would I hedge against that and short it? Surely better to exit the position and re-evaluate?”
I guess we have demonstrated very nicely one of the keys to successful trading – namely find something that works for you and stick to it! Your Alcoa trade is a great example of that.
Thanks for the comment and keep them coming!