Market-Neutral Trading: Combining Technical and Fundamental Analysis Into 7 Long-Short Trading Systems by Thomas K. Carr

Author:Thomas K. Carr
Language: eng
Format: epub
Published: 2018-09-11T16:00:00+00:00

POSITION SIZING AND MANAGEMENT TIPS

Once you have your trading orders for the day, your last task is to decide how many shares to buy and sell. Your default apportionment for this task is always to divide your trading capital into an equal number of positions, work out the percentage allotted to each position, and buy or sell short only that percentage. You will also want to rebalance regularly any current holds that have moved significantly above or below that percentage. In this way, you will be in a constant state of profit reinvestment since the same portfolio percentage on a growing account will naturally mean more cash allotted to each new position. Moreover, you will also reduce risk, at least for your long positions, by taking profits off the table in your winners, and you will potentially increase profit potential by adding to those longs that have pulled back under your entry price.

Your short positions are a different matter. When they show a higher percentage than your standard allotment, it means that they have moved against you; you are now underwater in those positions. This is a common occurrence in strong bull markets. While it is perfectly reasonable to add cash to long positions that are underwater—after all, these are strong trading candidates both technically and fundamentally—there are many reasons you do not want to add to losing short positions. I normally reduce the size of losing short positions at rebalancing and maintain the size of winning short positions even though they now show a percentage allotment below the average. To fill in that gap, which can be significant in strong bear markets, I prefer to add new short positions. The odds of winning always favor a fresh setup than one that has already moved significantly in your favor.

Most of you can figure out what works best regarding how many positions to keep open concurrently (thus, what percentage of your trading capital to allot to each position), as well as how many systems you will spread those positions over. In general terms, the larger the number of positions (and thus the smaller the percentage of capital in each) and the greater the number of systems those positions come from, the lower the risk; the smaller the number of positions and the fewer the number of systems, the greater the reward. Thus, your own personal mix depends on your risk tolerance.

If it helps, I teach my coaching clients that everyone should trade at least two systems—one from the fundamentals-based list and one from the technicals-based list—and that at least eight positions be held concurrently, which would normally mean two longs and two short positions per system. All the systems described here are scalable, however. If you are trading $100 million and need to hold a large number of positions to avoid becoming part owner of any one company, you may do that. The systems are flexible. Simply trade all seven systems and screen for, say, the “top 10” or “top 12” longs and shorts in each.

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