I've decided that my list of rules is too long (see somewhere below). I've decided that I have only 1 rule. Whatever trade I put on, I can risk no more than 2% of the liquidation value of that account. So if I have an 8k account, I can risk $80 x 2 = $160 per trade. If I have a 2k account, I can risk only $40 per trade. Not sure how I will trade a 2k account, perhaps scalping only. In any case, this is my 1 rule.
I can still risk this money in different ways. For example I could go long stock, and set the stop so that I lose max $160 on whatever position I take. For example buying 100 shares of a $30 stock with a $28.5 stop would lose $150 max and even provide a few bucks for commissions. Or I could buy an option worth $320 and set a stop on it to sell automatically if it touches $160. Or I could spend the whole money on one option for $160, or hopefully very rarely, buy 4 "lottery ticket" OTM options for $40 each.
If I need to lower/loosen the stop, well then I need to reduce the position size accordingly. No matter what I do, the risk can absolutely not exceed that amount of max loss. 2% is ok. It is sad when it occassionally hits that stop -but I can sleep at night. The past 48 hours have been horrible. I am still holding some options in the "hope" they recover, right as we go into "sell in may" and as Goldman Sachs gets investigated criminally tonight... I hate hope. Hope is not a strategy. Prayer is not a strategy. You can't control what the market is going to do, so all you can do is control how much risk you are going to expose to it.
Also here is a good article from a guy on stock twits on trading rules:
Joe Fahmy's trading rules
I’m in my 30s with $2.5 million in real estate — how can I generate more
cash flow?
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I was scrolling through Reddit recently and came across a post in the
r/fatFIRE community that sparked some interesting conversation about cash
flow stra...
3 hours ago
2 comments:
As FNG would say - Hope kills.
Thanks for sharing!
have you ever heard about R values from van k tharp? it is basically what you are doing here and it helps to compare your trades, apples to apples. R is your risk, in your case $160. You take your risk, divide it by the stop distance, and figure out the amount of shares you can buy/sell. The most you should lose is -1R (your risk) and for me, with my winning percentage at 40%, i need to gain 2R to 2.5R for the winning trades to be more money than all my losing trades.
although i have to say, i think $160 risk per trade is a lot for a new trader. 5 bad trades on a day, and you lose 10% of your account. it is hard for me to risk $25 per trade. but that is my problem. an emotional attachment to the money.
p.s. full disclosure, i have yet to become a profitable trader, HA!
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