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
P.S. Save $50 PER MONTH on my subscription trading newsletters!
SAVE on my Under $10 Stock Trader Service!
SAVE on my Option Trader Service!
SAVE on my Trend Trader Service!
Technorati tags: stock trading stock market investing trend trading swing trading option trading stock options stock option trading Bill Kraft
To comment on Bill's article click on the "comments" link below.