To thread and Dave O... Dave - Thanks for the response...|
"I don't trade a fixed number of shares but I do tend to trade a fixed amount of $$$, plus or minus 15%. So I determine the number of shares I want to trade based on the stock price. I might trade 1000 shares of a $25 stock but 100 shares of a $250 stock like QCOM. Reason? I want to keep the amount of capital as risk in any single trade in the same ballpark relative to my total trading account."
To the thread in general:
This raises an interesting question...at least for me...I hope I am not showing my naivete but I have always wondered about this style of trade/account/risk management. Let me labor thru my thought process and then maybe some of you will comment...
If I entered 4 trades today (not simultaneously)
long KTEL 1000 shares @ 7 1/2
long CLRS 1000 shares @ 24 1/8
long 500 shares BRCM @ 147 1/4
short 500 shares QCOM 255 3/8
I consider my risk to be relatively the same in all the above trades.
here goes the naive part...what is my risk...My risk is the amount of money I allow myself to lose, not the amount of money I am using ...the amount of money is just a tool to trade with. I know that a lot of traders consider the amount of money on the table as the amount of risk...if this was an investment I guess I would understand but as a daytrader my risk is the distance measured in points that I allow the stock to move away from my entry (up for short, down for long) before exiting, multiplied by the number of shares...granted the ability to execute an efficient exit is a factor but as stated in previous post I will not trade stocks or size that I can't efficiently execute.
In the above scenarios I set my stops (as a general rule)based upon the tracking of my trading style/performance which indicates that my performance is maximized when my stops are in a certain point range(for example 1/8 -3/8)...I do not consider either the amount of buying power used, price of stock, or dollar amount of stop/loss...granted a 1/4 point stop/loss in a 1000 share position is greater than the same stop/loss in a 500 share position and I will at times factor that variable (and others) into my stop/loss but that is not my focus...
my focus is the exercise/game of watching an ebb and flow of numbers...the numbers go up and go down, vary in rate of incline /decline and length of pause...my participation in this game is to try (with all the tools at my disposal) to identify and recognize in this flow of numbers an order/arrangement/sequence/pattern that enables me to pick a number(entry) within that flow and then pick another number from the continuing flow(exit)...my goal is to have as great a distance between those two numbers if positive or to minimize the distance if negative...
I don't mean to insult anyone with such a simplistic view...trading is more convoluted than a game... but if I focus on the amount of money on the table I am fettered by the emotional baggage that comes with having a cash register in the mind...these emotions often cause traders to look at the deluge of information through rose-colored glasses, obscuring the facts, thus giving emotional responses to stimuli an undue power and influence over a daytraders trading decisions.
If you average down I am to assume that you have made a conscious decision (thru your respective analysis) that the stock will again climb and test level of resistance...you add to an already existing position - increasing your share size with an expectation of reversal...you believe as Dan Duchardt so aptly stated you can make a case for increased probability of a reversal, and a more dramatic reversal, the farther a stock moves away from what might be called, for want of a better term a "natural level".
If this was your true commitment would not a better strategy be to close your initial position of 500 shares at a small stop/loss, buy 1000 shares at your next level, if no reversal exit with a small stop/loss, buy 1500 shares at your next level, and so on. This would minimize your losses if no reversal occurs, and maximize your profit if a reversal does occur. Am I just being terribly naive or am I showing my ignorance? Or is there a contingent of traders that average down because they fail to be able to accept their initial loss?
I know some people will say but look at all the orders and re-orders...isn't that just a fundamental part of being a daytrader...isn't having the ability to execute orders/trades in such a manner an integral basic element to daytrading...if you do not have the ability to efficiently execute in such a manner what business do you have attempting a fairly advanced technique (rumored to be)of averaging down in the first place.
just some random thoughts, be gentle with your criticism, I'm just a daytrader hehehe :)