Answer to Money Management questions depends on individuals circumstances. We all have different risk tolerance level.. so there can't be any right or wrong answer. I am expressing my views on these questions keeping in mind how I am handling/will handle them.
1) In miniflow should you consider 2% per trade or 2% per day. The max no of trade we should take is 4 and hence shouldn't we do it as 0.5% per trade?
Generally risk is defined as x% of acct captial per trade. We will never know if there are going to be 4 trades or not, whether they all will hit the max risk or not.. so I would define it as risk per trade. Infact, I also have risk limit for each day (say 4% of acct size), risk limit per week (say 6% of acct size) and monthly limit (say 10% of acct size).
I adjust my position size and reduce risk per trade, if I find that I am closing to any of the higher timeframe risk limits.. It keeps tab on my emotions and lets me be in the game longer. If any of the limit is hit, that means I Am out of synch with the mkt and my strategy is not working. So rather then fighting it further, I take time off for defined number of days/weeks from the mkt. Sort of penalising myself.. I heard in trading floor of investment banks, if a trader looses his monthly limit during the month, then he has to support other trader, get orders from them, bring coffee for them etc.. That humiliation helps everybody trade within the defined boundries . So I have createed similar mechanism for myself.
2) Is it advisable to commit profitable trades as fresh capital next day?
Certainly it makes sense to ride the winner. But make sure that u are adding on at the right entry signal. I will also check if RSI/Stoch are not in OB/OS zone, how long the trend has been in place, any other signs of trend exhaustion like making higher highs but not high enough.. etc
3) On a same day if I make profit in 1/2 trades is it ok to increase the position in next trade because my absolute risk in money terms is less because of profit in earlier trade?
Great question. I also thought that any profit from market can be risked but all other risk mgmt rule applies to my initial capital only. Later on when working on psychology I got different insight into it. Now, my belief is, The money has only one color. Whether it comes from the mkt or from my saving acct.. once it is under my control, it is my money. So I treat any booked profit from mkt as my capital and respect it as if it has come from my saving acct. So it has to follow same rule of risk x% of that on next trade.
Moreover, if you are risking more money on next trade because of last profitable trade, u are signalling to subconscious mind that it is ok to take bigger risk on some trades. That dilutes the importance of whole risk mgmt process. So, if we consistently pass the same message that risk per trade is xxx amt, each trade is mutually exclusive event, doesn't matter what was the outcome of last trade.. .. our subconscious mind is not confused.
4) After opening bell should instrument with higher risk sized low or high? As compared lower risk. Assuming I am trading more than one instrument.
Actually it should not matter whether the trade is high risk /low risk.. as long as your have defined x% of capital per trade as risk. Because capital is known at the start of the day, you very well know the 2% of that in Rs. terms and that should help in deciding the position size.
For ex - Risk per trade is 10000. Risk for new trade (difference between etnry point and stoploss point) = 50 Rs.... so your position size will be 10000/50 = 200 stocks.
If risk for other trade is 40 Rs. then your position size will be = 10000/40 = 250 stocks.
So if u use above logic, then it doesn't matter what is the distance between entry and stop.. because in either case, you are not risking more then 10k on the trade. Only thing that changes is #of stocks that you would buy..
Happy Trading.
