One stock sells bleach and the other one sells security products for personal computers, totally unrelated which is great.
Position equalization is one of the most valuable stock swing trading techniques I know of. For more information about different stock swing trading techniques, please visit our blog. GOVERNMENT REQUIRED RISK DISCLAIMER: FUTURES & FOREX TRADING HAS LARGE POTENTIAL REWARDS, BUT ALSO LARGE POTENTIAL RISK.
UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING.ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY.
Last week I wrote an article about relative strength between two related stocks or other related markets. Now we have to figure out the most important question, how many shares do we buy of each stock.
Start with figuring out how many shares you want to trade for most volatile position out of the two stocks.
Regardless of the stock swing trading techniques you pick, you need to make sure your trading apples to apples and not apples to oranges. Next time i will discuss using the ATR to help pick the best stop loss levels to avoid volatility. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. THE PAST PERFORMANCE OF ANY TRADING SYSTEM OR METHODOLOGY IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. For the same of simplicity, let’s say you trade breakouts and you pick two unrelated stocks to avoid correlation. This way regardless of what market you trade against another market, it will appear dollar wise like your trading the same markets. Your first stock is Clorox, the bleach manufacturer, here’s what the stock looks like before you enter your order to go long. I know one trader who would bet 100 shares across all stocks but some stocks moved 4 points per day and others moved 2 points per day so his losers and winners were not balanced and there is no way to create a trading strategy when your positions are not equalized to each other.
Just imagine you trade two stocks and the one you bet the least on wins the most, this is not what you want, you want each position to be as equal to your other positions as possible. Here is the easy process that will help you trade any stock swing trading techniques using balanced positions.
Since 100 shares were chosen for Clorox stock, you would multiply 1.69 * 100 shares = 169 shares of Symantec stock for every 100 shares of Clorox Stock.
The ATR stands for Average True Range and it’s simply a daily calculation of the average trading range of each stock.
You can figure out this yourself, but most trading software online and offline has an ATR indicator already build in.
The ATR indicator will tell you what the average trading range is for each stock that you trade. You can easily see that Clorox is almost twice as volatile as Symantec, so trading equal shares wouldn’t produce a very even profit to loss ratio between both stocks.
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