Monday, October 29, 2012

More on Position Sizing and Stop Loss

In the first interview of Jack D Schwager’s “Hedge Funds Trading Wizards” global macro trader Colm O’Shea offers some excellent advice to traders on setting of stop loss and position sizing. 

According to him a trader should first decide the point where his/her trade will be proven wrong and then set the stop. If the stop implies a loss which is larger than the trader’s comfortable level, then he/she should size the position to a correspondingly smaller level. Now, if the market hits the stop point, it will be consistent with the trader’s own beliefs that the original trade premise was wrong.

According to Colm O’Shea a trader has to embrace the logical consequences of his/her ideas, and that means that he/she has to have a stop loss that is wide enough. In his earlier days he used to set stop based on his pain threshold and not upon the underlying hypothesis for the trade. The market does not care about anybody’s pain. 

He learnt from his mistake and now when he gets out of a trade, it’s because of the inconsistent price action with his hypothesis. In his words-“Hmm, that shouldn’t have happened. Prices are inconsistent with my hypothesis. I’m wrong. I need to get out and rethink the situation.” 

So stop loss should be set at the point where the original trade premise is proven wrong and the total amount the trader will lose if the stop point is hit should be based upon the trader’s risk appetite.

As always  readers are welcome to share and enhance knowledge.

[Contributed by Jitender Yadav]


Rakesh Shethia said...

Hello Sir..
Till Friday, you had a view that no new positions should be created if you have none. Today, it changed to - can create long positions. What price action lead to this change in your opinion? Nifty did not break the range, Lows made during first hour did not sustain, Market did not close at the highs.

vivek srivastava said...

please name some trading books at least 10

Shivpratap Singh said...

If i go long, ideally previous days low is my stop and vice versa.I think it works well for swing trading

Shivpratap Singh said...

For swing trading i keep previous days low as stop on my long trades, and vice versa for short

vivek srivastava said...

sir I have started reading your blog recently,very clear cut vision of you trading style has made my interest in trading . I will read all your articles on this blog , but one thing with due respect I want to know the good books on trading . this will save my lot of time and also others who are interested to study the trading theory. I will be thankful for my whole life to you for your recommendation

prabsharan singh said...

sir, i am greatly influenced by your blog and i regularly listen to your views on cnbc. i want to know a good broker to open a trading acc..pls help me on this..there are plenty of brokers to choose from...pls recommend the best one..i will be very grateful to u..

Tapassya-Manthan said...

RBI has issued instructions that banks now wont give loan to purchase gold.

what does it mean ?

Please share.


Bill Morris said...


I personally believe this means that the banks do not want to lend on margin. After all, if they loan ypou money to buy Gold, and the price of Gold drops, then your asset is worth less then the loan you took out. This makes the bank at risk of not getting paid back.
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