Risk - Are You Taking On Too Much Trading?

Posted on February 13, 2009
Filed Under Stock Market |

Ask any investor and they will tell you that they accept the risks associated with trading. However, its more than just accepting fate. Its about how much risk you are putting your portfolio in that separates the successful investors from the ones that are destined to talk about the one that got away. Here’s some a href=http://www.marketedge360.com target=’_blank’free investing tips/a you can take to the bank.brbrDid you know that by increasing the number of positions you hold, you can actually take on more risk without risking your entire capital? Let me explain.brbrFor years, I used to trade 1 position at a time. When I was right, I hit it big. $1000 days were not out of the question. Of course, with great risk, comes great losses. For more times than I want to remember, I watched a small gain turn into a big loss while the market retraced. An recent example had me buy shares in a company at $55. It dropped to $53 the next day, and fearing for more losses, I got out. A move of 3.6% and I was stopped out. The following day, I watched as that same stock moved from $53 to $65 (missing out on an 18% move up). brbrPerhaps the fact that I had 900 shares had something to do with it. All that I know is that if I had held a little longer, I would have been up close to $9000.brbrBeen there, done that too many times. brbrIts all about position size when it comes to managing portfolio risk. The larger the size, the more risk. Most stop loss methodologies involve either a percentage below the share price, or a level of support. The further away from support the share price is, the larger the risk, especially if the position size is large. Setting your stop loss just below support is a great way to trade. If you bought 1000 shares of ABC at $10, and support is at $9, you are risking $1000 if you are wrong. It represents a 10% loss. What if you took on a smaller position of say, 500 shares? Your stop loss represents only a $500 risk. If Mr Market disagrees with your opinion about a stock, it wont hurt as much, since your loss will only be $500. brbrNow, what if you did something differently. Did you know that if you increase the number of positions in your portfolio to 10, a 30% loss in 1 stock represents only 3% of your trading capital. In my case, I certainly would not have been stopped out. Instead, I would have enjoyed the better part of an 18% gain. brbrIn these volatile markets, every trader has to expect that there will be retracing of any gain. By managing your risk, you stand a better chance of not only keeping your money, but making more of it.

Tags: Stock Market

Risk - Are You Taking On Too Much Trading?

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