Thanks for your reply.
There is a C. 100 becomes 95, and you are out. Market recovers back to 100, but you are unwilling to buy at 100, what you sold at 95. Then it goes to 120, justifying your original Investment thesis, but you will no longer have the position.
No ,unwilling to buy at any level is breakage of rules for me. My buy is decided basis: a. market direction b. entry set up. I do not mix trading plan here (position size, risk commitment etc). If I am not able to buy at 100/105 or anything basically my behavioural finance is not supporting my execution.
Now, when 100 becomes 95, what is more likely - B or C. Even if you get back in again at 100, the same situation can recur, causing losses from repeatedly moving in and out.
In general, the tighter your stop loss is, more frequent C will become. Your stop loss has to be wide enough to prevent stopping out, as long as your original reason for taking position is intact.
I do not increase my stop loss to prevent myself stopping out. My stop loss is decided basis: Average winning margin- if I am making 15% with accuracy of 50% I will be hesitant to use a stop loss more than 6-7%. In fact when I start losing or get whipsawed I reduce my stop loss and position size.
If you are getting stopped out again and again there may be issue with entry set up or market condition. By giving extra stop loss I will allow myself more losses for a root cause lying somewhere else. If market is hostile there is no point in fighting, if squat is happening after entry I need to work on entry method.
I read your previous post. We have slightly different definition of risk (mathematically), so there may be some confusion. For me, risk is never negative. You are distinguishing between your original capital and unrealised profit, therefore, allowing negative risk when you are only giving back part of unrealised profit. This perspective can help psychologically, especially if you are highly risk averse. But this separation is not a useful logical concept. Hence, for me, risk is the amount I am willing to sacrifice on my present position.
Risk management is build around inherent risk and residual risk. Risk can not be eliminated fully, can be reduced to a extent which is tolerable. As long as I am computing below its fine, I use the word negative risk due to credit amount in risk. Please feel free to give any other name.
- My risk of ruin should never exceed zero.
- My residual risk should be tolerable at a position level and portfolio level.
Yes I am risk averse, the first thing that comes to my mind is save capital. I look for low risk and high profit . I do not subscribe to the theory that you have to take higher risk for higher profits. I would say I would like to be opportunist but aggressive with a flair of conservatism.There is nothing unrealised profit for me, every thing is realised. The real money I will get if I sell, inability to sell should not become obstacle.Sell should be driven by rules again, my rules are build around to protect profit once I start moving in that direction. Obviously while repeating the process of protection I can not capture entire portion, I have to give it back some of them.
Of course risk is amount you are willing to sacrifice on every position. When a core portfolio gets increased pyramid it creates a portfolio level and stock level risk. I do agree, the R (risk factor) calculation for me is basis transaction or else I wonât get accuracy. Without accuracy I wont know what is my expectancy. Risk have usages at a whole and granular level.
Short selling
Differences lies in multiple places. Position sizing is a money management subject, please feel free to use your own.
- The level playing field is not same. Limited opportunities exist in stock market, easier ones are derivatives and intraday (time bound and restricted to some shares). Stock lending and borrowing is not that user friendly in India.
- Short selling set ups are different. Traditional long set up like break out/say reverse break down seldom works due to limited period nature.
Again short selling are more target driven as they lasts short. Pyramid etc are riskier, but if you can follow and manage well and good.
By the way money management depends on the metrics one maintain. I do not follow any theoretical forecasting. If my expectancy goes down my position size goes down, stop loss becomes tighter. Reverse is scaling up. Money management to me is not standardized but customised.