In my earlier post Risk Management I outlined my general risk management philosophy. When entering a trade, I first pick my stop then determine the number of shares to purchase based on a pre-defined max risk per trade. For example, currently I am using a .5% per trade risk. This method works very well, however, by itself its too rigid.
Ocasionally there are circumstances where I may need to risk more or less than .5% per trade. One example is during periods of market uncertainty. During this time I may want to scale back and risk less per trade until the market stabilizes. Other examples would be when utilizing an extremely tight stop. A signal may be generated when the stock is close to a significant support level affording me the opportunity to use a tight stop. By using the .5% per trade, I may end up purchasing a significant number of shares and becoming over leveraged in one position. Even with highly accurate signals, a tight stop can increase the chance of being taken out simply due to random noise.
By using less risk per trade in these instances I can better account for the increased risk associated with tight stops or market uncertainty.
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