Maximum Loss Allowance revisited

The next issue I need to consider is how much emphasis that I should put on my preference to having most of my capital in play at any given time.

Does 10 stocks allow this as they cycle in and out of trades?

I am currently using 50 shares per trade and 100 if the price is around the $20 mark. Should I find that this plan works well but only has half the stocks in play at any given time I will need to consider upping to 100 share trades.

Maximum Loss Allowances (MLA) and compounding effects come into play here.

My MLA has typically been very small, $20 for some daytrading and $50 to $100 for previous medium term trading. Previously I was considering that $5,000 was my capital base to work with and 2% would be $100.

So, 2% capital risk per trade was my setting. I now consider that I am working with $15,000 (three accounts combined) so my 2% rule takes me up to $300. On a 100 share trade that is a $3 allowance per share which is about what I need in order to use P&F charts for entry and stop settings. Of course if I get a better entry then my MLA for that trade gets smaller as the stop does not move.

My effective MLA right now is 1% as I am using 50 shares. My main reason is to allow more trades to prove the plan first.

Perhaps a point to consider would be to up my MLA rate to 3% should the plan prove to be successful enough. This would effectively increase my position sizing by 50% and negate requiring as many stocks, as long as the ones that I am trading keep me far enough into the green to weather higher losses on the stopped out trades.

In order to take advantage of compounding I need to get new profits working quickly. So a $300 profit should be able to go towards building my working capital, which needs to be actively in play to be working...which brings me to the issue of how much emphasis to put on staying in play most of the time.

I think for the time being I should not concentrate too hard on this. Just get the ten stocks working in their various cycles, perhaps have a few in the wings to parachute in when one or more lose the nice patterning and just worry about making the trading plan work, figure out the edge and go from there.


Jeff.