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3 Day Hammer Stocks
How to Determine the Number
of Shares to Trade
You need a simple method for
determining how many shares of a stock to trade. This is not something
that is usually found in most trading systems. However, it is
essential money management.
To figure the number of share, your
trading system must provide you with your total trading equity and
your stop loss.
Next we need to determine how much of
the equity we will place at risk. Now, this is not the total cost of
the shares but rather how much you are willing to lose. Suppose you
start with $100,000. Your equity is the $100,000. Letís begin by
risking only 1% of you starting equity. Why 1%? A lot of traders,
smarter than me recommend 1%. It means that you can make a lot of
mistakes and still be in the trading game. I believe Larry Hite,
trader extraordinaire, said that trading more than 2.5% of equity make
you a gunslinger. Using a higher percentage will make more money if
you are right, but it will permanently put you out of the game when
that inevitable string of losses occurs.
must determine their own risk factor
To repeat, 1% of $100,000 equity does
not mean you purchase $1,000 of stock. That means the maximum you are
willing to lose $1000. Now, we need to decide where we will get out of
the trade if it goes against you. That is decided by your trading
system. For example, you buy Wal-Mart at 45. You system says get out
at 40 or a 5 point loss. If you decide to risk 1% of your account
$100,000 or $1,000, then simply divide 1000/5 and get 200 shares of
WMT. If you get fractional numbers round down to the nearest whole
number. By varying when to close a position, you can see how the
selection of your stops and starting risk affect your trading system.
Amount of portfolio to risk 1.5% ($750)
Stock Price 40
Stop 5% of stock price ($2)
You buy 375 shares.
You have a $2 stop and are risking 1.5% of equity.
In other words, if
you purchase 375 shares and the stock goes down $2, you lost $750 or
1.5% of the portfolio.
Amount of portfolio to risk 1% ($500)
Stock Price 47
Stop 10% of stock price ($4.7)
You buy 106 or 100
(round to nearest whole number shares. You have a $4.7 stop and are
risking 1.% of equity.
In other words, if
you purchase 100 shares and the stock goes down $4.70, you lost $470
or about 1% of the portfolio.