Risk Management: Red Day

If you watched me trading today, you saw that I overtraded and lost really bad. I tried to blame my loss on chatroom technical issues at the Open and on the market overall, but in all honesty, I myself was the problem, and no one else was to blame.

Someone in the chat asked me what share size I took on TSLA. The answer was 300 shares, but I did not give that answer. My answer was that it does not matter what my share size was, because other people are trading with different account sizes and risk parameters than I am. It is absolutely irrelevant how many shares others are taking.

Let’s read the email:


Since you mentioned about share size in the room today, and it sounds like you don`t understand why people always ask, I think I can give out my explanation.
Even though we set up a trade with same risk reward and same share size, the different stock will bring us different profit. So how can we adjust our share size for proper target profit? Let`s say our daily profit target is 500 bucks. Take some stocks for example.
MU, we need to take 500-1,000 shares each time to generate around $100.00 in a good move.
AAPL & FB, we need to take 200 shares for the same result.
AMD, however, we need to take probably 2,000 shares every single time to make the trade worth a try.
If we plan to hit our daily goal, we need to get 3 successful trades with proper share size based on its unique price range.
You always suggest people to ask themselves what their daily goals are before trading. What if people already have a daily goal, but they just don`t know how to get there?
So Andrew, I would like to suggest you to break the general talking into details and show us the path to the success. Your opinion?”

To answer this question, I encourage you to watch Class 5 again or read the chapter on risk management in either of my day trading books (Chapter 3 in the first book and Chapter 7 in the more recent advanced book).” Traders should NOT define their share size based on their daily profit target, they must define based on their stop loss on that trade.

I repeat again one of my most important rules in day trading: you are not allowed to risk more than 2% of your account in one single trade.

After I replied to this email, another email came back with an additional question:

“Let say we trade with the typical $25,000 account with 1:4 margin. The pattern is very clean, risk reward ratio is as you suggested 3:2. It is an ideal situation. How many shares should we take as it for BABA, or how many should we take for MU.”

I appreciate the question. Again, the problem is you are thinking about how many shares you must take to get to your daily goal of $1,000. But that’s not how you should look at it. You should look at it from a risk perspective. And, in order to do that, you need to define:

  1. Step A: Total risk on your account per trade (typically 1-2%).
  2. Step B: Stop loss on each trade based on technical levels (10 c, 20 c, 50 c, etc.). For higher price stocks like BABA or TSLA, you should give it more room.
  3. Divide A by B and you have the maximum share size you are allowed to take.

Now, let’s review your example above:

  1. Your account is $25,000. 2% of your account is $500. Let’s say you are a conservative trader and want to risk only 1% or $250.
  2. Imagine your stop loss on MU is 10 c and on BABA it is 50 c. The trader did not mention those figures in her email, I’ve just assumed that.

Your share size will then be:

For MU, share size = $250/0.10, which is 2,500 shares.

For BABA, share size = $250/0.50, which is 500 shares.

You may not have enough buying power to buy 2,500 shares of MU for example, but that is fine. That 2,500 figure is the absolute maximum number of shares you are allowed to trade on MU on that trade. You can buy or sell short a smaller number of shares, but not a larger number. In this instance, you might want to trade only 2,000 shares instead.

Talk soon and see you in chat,


PS: Please feel free to go to our YouTube channel and watch my live trading and trade recap for today. https://www.youtube.com/watch?v=VpUqmkeW4U8