Saturday, July 05, 2008

How Many Positions to Hold

Last weekend, in response to a subscriber's question, I discussed the issue of how much money a trader needs in a trading account. As is often the case with trading, the answer is "it depends" on the individual and his or her goals, needs, risk tolerance, time available to trade, and so on. That same subscriber had also asked how many positions to hold in order to have a good mix of issues. Again, the answer is completely dependent upon the individual.

One of the most important, if not the most important, factors to examine in answering how many positions a trader should have is how many can that individual manage. I often have as many as 30 positions working at one time, but I certainly would not recommend that high a number for the vast majority of traders. Trading is what I do, so I am devoting a significant amount of my time to monitoring, entering, exiting, and adjusting positions. Clearly, that is a much different scenario from someone who can only look at the markets on the weekend or at night. I once had a student who traded for a living and only had one position at a time. I have lost contact with her, but the last I had heard, she was a successful trader.

Many factors influence how many positions a trader can manage at one time. They include the trader's level of knowledge, the strategies he is employing, and the time he can devote to his trading. Obviously, in terms of monitoring, it is one thing to buy a stock and place a trailing stop and quite another to trade near the money naked puts which might require relatively quick action to adjust, close, or roll the position. In Appendix D of my book, "Trade Your Way to Wealth", I set out 15 strategies and compare things like the level of monitoring required for each as well as things like relative risk, capital required, time frame, desired market direction, and expected time frame.

Depending upon capital, a true buy and hold investor who has a full time job could hold a fairly large number of positions while that same person who pursued a different strategy like swing trading long options would probably hold a smaller number of positions. As I have written in the past, these are considerations the individual investor should address when creating his individual personal business plan. The conclusions may well differ for each trader, but it is an important decision. Trying to manage too many positions can result in missing something on one or another -- believe me, I speak from experience. In my early years of trading, I was so excited about what I was doing that I did make the mistake of having more positions than I could effectively track and I burned myself. That episode taught me to limit the positions to a number I can manage and I have been faithful to the concept ever since.

In the coaching sessions, I sometimes encounter students who have not considered a limitation on the number of positions and find it difficult to keep up with themselves. I try to suggest that they establish a comfort zone both in terms of risk and in terms of manageability. It is my personal belief that traders should confine themselves to strategies and amounts of risk that permit them to sleep comfortably at night. Inability to manage positions whether it be from lack of knowledge, lack of experience, or just too many positions to manage does not lead to relaxed trading in my estimation and that, in turn, can lead to emotional and bad trading decisions that we all want to avoid.

I hope you are enjoying a wonderful 4th of July weekend!

by Bill Kraft, Editor
Copyright 2008, Makin' Hay, Inc.
All Rights Reserved


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To comment on Bill's article click on the "comments" link below.

12 comments:

Anonymous said...

I've enjoyed reading your weekend comments and decided to order your book from Amazon. It was a bad experience. They sent a book with a similar title by Van Tharp and I was unable to get them to correct it. No more Amazon books for me. I may try another source.

Bill Kraft, MarketFN.com said...

Dear Anonymous, thanks for trying to buy my book. Sorry you had trouble with Amazon. Traders Library (www.traderslibrary.com) carries it as well and has a decent price.
Bill Kraft

Dennis Fowler said...

Bill- Got your book! Great job!! You are one of the few who can put together an effective learning tool that is a comfortable read. Thank you for doing it!!!

You mention in the article that you manage up to thirty positions at a time. In your book you state that you "Have success working a couple of hours per day". Is this just writer's hyperbole , or do you really?

One other question: If one subscribes to two of your newsletters is there a lesser price?

Thank you for your good column each week as well. I really like your writing style.

Dennis Fowler dfowler3545@charter.net

nissanle said...

Dear Bill,

Thank you for your knowledgable articles. Can you please elaborate on the possibility to hold both long and short positions at the same time? Theory tells us never to go against the market trend, so how can a trader hold these 2 opposing positions at the same time? I personally trade on both time frames of 60min and Daily.

Thank you,

Nissanle

Bill Kraft, MarketFN.com said...

Dennis, thanks for the kind praise about my book. No, it isn't writer's hyperbole, I do work a couple of hours a day and often manage 30 or so positions. The trick, as I suggest in the book, is that I try to have everything in place including exit strategy and adjustment strategy before I ever enter a position. Once the position is entered, I regularly have orders or alerts in place to take care of the position so it is essentially on "auto-pilot" and I just do a quick review a time or two a day. The publisher of MarketFN is in charge of pricing so I'll forward your question about discounts for multiple services to him. I'm glad you enjoyed Trade Your Way to Wealth, and I appreciate your letting me know.
Bill Kraft

guitarmom said...

Dear Bill,

I'm reading your "Trade Your Way to Wealth," and got to wondering about exercising put options. I used to sell covered calls regularly, so I understand what happens when a call is exercised.

But as I read about Bullish Put spreads and unwinding trades gone bad, I'm wondering about the minutia involved in exercising puts.

I have a number of questions, which may best be answered in a future column.

Are puts commonly exercised before expiration? It seems there'd often be good reason to do so.

If you enter a bull put spread, and get called out at expiration, how long do you have to exercise the put you bought?

Since expiration is actually noon on the Saturday after the third Friday, how long before a put writer would know whether or not he's been called out?

Thanks for your attention to these picky little details. I appreciate your time.

Bill Kraft, MarketFN.com said...

Hi Nissanie and thanks for writing. It is not uncommon to hold long and short option positions at the same time. Perhaps the most widely practiced form is the spread where the trader buys one leg and shorts another leg. There are several different reasons for doing this including limitation of loss and generation of income. Spreads can take several forms such as:
-Buying an option at one strike and selling a different strike with expiration in the same month which is known as a vertical spread and affords limited risk that can be entered at a debit or a credit
-Buying options that expire in different months but which have the same strikes as the options that are being sold which is known as a horizontal spread, and
-Buying an option with a strike that expires in one month and selling an option with a different strike and a different expiration month which is known as a diagonalized calendar spread.
It is a big subject and, if you have read my book, Trade Your Way to Wealth, you will see a number of ways to trade these spreads.
Hope that helps.
Bill Kraft

Bill Kraft, MarketFN.com said...

Hi Guitarmom. Thanks for buying my book and I hope you are enjoying my DVDs as well. I'll try to answer your questions here since I am afraid that many of the Newsletter subscribers may not be interested in put spreads or options at all. Anyway, here goes:

Puts not only can be exercised early, but when in the money are sometimes exercised early. Generally, one would not expect early exercise if there is any time value remaining because the person who is long the put would do better by just selling the put and the stock. By doing that, he would get the intrinsic value of the put plus the time value as well as the price for the stock. By exercising the put, he would only get the time value. Some people who have bought protective puts, however, do not think that through and just exercise as a result of panic.

If you are almost at expiration, and the stock price is near the strike price of the put you sold, it is generally a good idea to buy to close that leg, at least, to avoid being put the stock since your long leg will also expire and, once expired, there is no more time in which to exercise. If you sold an out of the money put some time before expiration, and the stock price is near the strike as you come into expiration, buying the put back will often still result in a profit. However, if the stock price has fallen well below the put strike, and no action was taken earlier to buy back the put, the loss could be greater. If there is value in the protective leg, the trader would consider buying to close the short leg and selling the long leg to reduce any potential loss.

If you held the short put position through close on expiration Friday, if the stock price were below the strike of the put you sold, you would automatically know the stock would be put to you.

Hope that helps.
Bill Kraft

Anonymous said...

Bill,
I have been in the business for over 30 years and I still look forward to your weekend newsletter for an objective, informed source of trading information. What ever you do, do NOT stop presenting the weekend newsletter.
Re: How many positions to hold and what kind of trader I am. I am on the market all day every day but I have client's positions to watch and follow. I can not devote total concentration to my own trading. I have been the victim of "the running of the stops" where a market maker or specialist sees a large amount of stock with STOPs at or close to a given level. They then run the price down, clear off all of the orders, and then let the price run back up. I hate this but there is not much that can be done about it. However, it does make trading additionaly difficult and creats the situation where I am hesitant to set or enter an official STOP order but attempt to monitor the price and act on observation. This re-introduces emotion to the trading process, something that should be avoided. Do you have any suggestions to mitigate this dilema?
Next, how many positions to hold.
I source I use recommded 10% of available capital in any one issue. This may be prudent but limits potential performance for the sake of diversification. I realize that putting all tradable money into one or two positions is higher risk, but, in my position, it is a little easier to handle. I would appreciate you feed-back.

dsb

Bill Kraft, MarketFN.com said...

dsb, thank you for your kind words. With your experience, it is a fine compliment and I sincerely appreciate it. With regard to your observations and question about stop orders, I agree that it can be a serious dilemma. Unfortunately, we don't know when or where there might be a "running of the stops." For those who can't be watching the market all the time I still believe placing a stop is better than not placing a stop since it ordinarily can get them out from under the falling piano and cut a loss. Of course, if the price starts right back up, they may have been had, but they can get back into the position. When I am actively watching the market, I set alerts and when one is hit, I look at the position and see what's going on. If it looks like stops are being run, I'll watch to see if it reverses back up and, if so, stay in, but if it doesn't turn relatively quickly, I exit. Another method that may be helpful is after a position has entered paper profitability set a trailing stop. Insofar as size of positions, I am a "money management" guy and personally never put all my eggs in a single basket. There are many ways, of course, to do that including equal dollar trades, Dr. Elder's 2%-6% approach, and a fixed percentage of the account per trade. You are right, of course, that when there is a big move, the trader with a money management plan won't make as much as the "all in" player, but he is much more likely to be able to stay in the game. Again, thanks for your email and I'm glad you are enjoying the Newsletter articles.
Bill Kraft

guitarmom said...

Dear Bill,

Thanks for all the info. This was really helpful.

And yes, I enjoyed your DVD's as much as I'm enjoying your book. You have a lot of trading wisdom, and I, for one, am glad you're sharing it.

guitarmom

Bill Kraft, MarketFN.com said...

Thanks, guitarmom. I wish you great success in your trading. It sounds like you are approaching it in the right way.
Bill Kraft