How Many Positions at Once

Another aspect of a money management plan is to decide how many positions you can trade at once. This is not as easy as just saying I'll trade a max of five positions. There are a lot of different scenarios you could take into account that will influence how much you will have on at any one time. You can, for instance, base it on a ratio of how much available money you have versus the risk levels you assumed. For example, if you already have four positions on but are only risking 25 percent of your at-risk-at-one-time capital, you may give yourself a clause that says you can trade up to seven positions as long as you are under 40 percent of your at-risk-at-one-time capital. But if you are already at 40 percent of your equity then you can only trade five positions. This way of doing it is a bit complicated and you will never have concrete rules. But it allows you to expand a bit if you are not risking as much as you would normally risk.

You can also have different limits depending on whether you are daytrading or holding trades overnight. For example, you may limit your daytrading positions to 4 at any one time, but you may allow yourself to take 10 overnight. It's easier to monitor overnight trades as you can do all your homework once the market is closed and then have all your plans, stops, and targets in place for the next day or whenever it is you get out of them. Now this brings you to another option, which is how many positions you can day-trade if you have positions you are taking overnight. If the overnight trades are long term you may want to give yourself more freedom during the day. However, if you plan to actively monitor and trade these the next day, then you may want to limit the number of new trades you put on and may not be able to trade anything new until you get out of at least some of the current positions.

And finally, I think, you will want to consider how you will handle trading in similar markets. Say you allow yourself to trade 20 stocks at once. The risk is a lot different if you are trading 20 semiconductor stocks, as opposed to four semis, three oil drillers, two banks stocks, a retailer, two drug companies, and so on. In the first scenario, you are exposing yourself way too much in one sector and it's almost like risking all your money in one stock. In the latter scenario you are spreading out your risk and are less likely to get hurt by a special event. So you should set limits as to how many positions or how much capital you are willing to risk in one sector.

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