by: David Jenyns

When trading in the stock market, position sizing is where all the tools of money management come together. It`s perhaps the most important part of your stock market money management rules. Position sizing is simply deciding how much you are going to put into any one stock market trade. You can calculate your position size using the other tools of stock market money management, your maximum loss and your stop loss.

However, many stock market traders believe that they`re doing an adequate job of position sizing by simply having a stop loss in place. While this will tell them when to get out of a stock market position, and will, with a maximum loss, determine how much capital they`re risking, it doesn`t answer the question of how much or how many units they can buy.

If you have already calculated your maximum loss and your stop loss, you can take these values, and plug them into a formula that will calculate how many shares you can purchase without exceeding your maximum loss. Although it is simple, the formula I`m about to give you is extremely powerful. The number of shares for your position is equal to your maximum loss divided by your stop loss size.

You`re already familiar with what a maximum loss is; but may not be recognize the term stop loss size. A stop loss size is the difference between your entry price and your stop loss value. If you were to enter the stock market with a one-dollar trade and set your stop loss at 90 cents, the stop loss value would be the difference between your entry price and your stock price, ten cents. Once you`ve entered these values into the formula, you can calculate how many shares you should buy so that you never risk more than your maximum loss.

Let`s look at how the formula works in practice. If your trading float was $20,000, and you were risking 2%, your maximum loss would be $400. If your stock market entry price was one dollar, and your stop loss value was 90 cents, your stop size would be ten cents. Now, the number of shares is equal to your maximum loss divided by your stop size. In this example, you can purchase 4,000 shares. If this stock reaches your stop loss, and you have to exit the position, you know you`re not going to risk or lose more than 2% of your float, which is $400.

This formula ensures the safety of your trading float. A little finessing that some of my clients like to do is to class their brokerage fee as part of the maximum loss. You could do this by subtracting the stock market brokerage fee from your maximum loss. If the stock market brokerage fee was $40 for your return trip, subtract 40 dollars from your maximum loss. Instead of entering $400 into the formula, you`d now enter $360. Once this is computed out, you can determine how many shares you`d buy, and know that you had included brokerage as part of your maximum loss.

By setting your position size so that you follow the 2% rule, you`re using a strategy that will limit the size of your losses during losing streaks. When you experience a winning streak, your position sizes will grow in a similar manner. By changing the amount of capital you`re deciding to risk, you`ll change the characteristics of your risk to reward ratio. All of your stock market money management rules will work together to make your trading system as profitable as possible.

About The Author
David Jenyns is recognized as the leading expert when it comes to designing profitable stock trading systems. Discover the "secret formula" of trading that anyone can use to consistently generate BIG profits from the market by downloading your FREE copy of David's new Ultimate Stock Trading Systems course. Click Here To Download ==> Stock Trading Systems http://www.ultimate-trading-systems.com/stocks.htm

by: Alexander Chambers

Hi - let me introduce myself. My name is Alex Chambers. I'm a UK medical doctor who has an interest in the stock market. I use a system first invented by a dancer called Nicolas Darvas in the 1950's. He made $2,000,000 working part-time - whilst travelling round the world on a dancing tour.

Why am I telling you this? Because his methods still work today. And they are deceptively simple to use. I used them to snag a lovely 120% gain on TZOO (NASDAQ) in 6 weeks in 2004 - using weekly data only and working my day job.

Nicolas Darvas was one half of a dancing team in the 1950’s called Julia and Darvas. Dancing was his day (or night) job. His dance team was one of the highest paid dancing acts in the world and Nicolas Darvas was successful in almost everything he did - this includes playing championship table tennis and creating crossword puzzles.

However, the stock market was his true love and it is this that really fascinates me about the guy. He was self-taught in the market but managed against all odds to accumulate a fortune, working part-time, of just over $2,000,000 in 18 months. Nicolas Darvas started from a stake of about $25,000 and made his fortune whilst travelling round the world on various dancing commitments.

Darvas detailed his exploits and how he created his system in his classic 1963 text, "How I Made $2,000,000 in the Stock Market". It’s a great read and I highly recommended it. Many investors regard the text as a classic. In it he provides an honest and open look at his experience from his naive start to his eventual success. He lays out, in great detail, exactly what he did and how foolish some of his actions were. Then he explains how he came to find success by focusing on the price and volume action of stocks.

A key message of his strategy is as quoted as follows:

"...My only sound reason for buying a stock is that it is rising in price. If that is happening, no other reason is required. If that is not happening, no other reason is worth considering..."

Sounds simple eh? The only other investor I know of before Darvas who used such a strategy was the legendary Jesse Livermore.

Also, remember that there was no internet in the 1950s and Darvas had to rely on outdated information in the form of a newspaper and daily telegrams on selected stocks to acquire information for his trading system. His broker mailed a copy of Barrons newspaper each week which contained weekly prices of stocks together with volumes for the week.

Darvas used a top down approach to investing - he only watched stocks from futuristic industries. In the 50's these were credit card industries and the jet age. Darvas realised that the expectation of earnings was one of the greatest lures to raise stock prices higher, and together with the futuristic industry screen, these were the only fundamental factors used in his Darvas Trading System. Today all you have to do is log onto Yahoo.com , go to Finance, and all this information is free.

Once he had satisfied his requirements for fundamentals, he tracked technical data in the stock. He liked stocks that were:

1) At or near their all-time high
2) Bouncing up and down in their "Darvas Boxes" (trading ranges - see below)
3) Had "Boxes" stacked on-top of each other like a pyramid
4) Showing an increase in volume with advancing prices
5) Priced greater than $10

He used "Darvas Boxes" as a way of entering and exiting stock positions. These are in essence a definition of a high and low trading range. A buy signal was created if the price just pushed through the top of a Darvas Box and the price reached a new all-time high. He used stop losses at the low of the trading ranges to protect the downside, and raised the stop loss as new higher boxes were formed. I believe Darvas was the first to use stop loss orders in such a way, and many financial institutions today still use Darvas Boxes as trading ranges, albeit on a smaller time scale.

That's essentially it. The story is utterly remarkable and has placed Darvas in the legends of investing history. If you're interested in more details and about how I use his system, please check out my website. All information is free.

To your stock market success also, Alex Chambers

Copyright 2006 http://darvas-investing.chambers-media.com

About The Author
Alex Chambers is a UK medical doctor who likes to buy & sell profitable shares. He also likes to go out dancing and lie around in bed, as well as enjoy the company of ladies. http://darvas-investing.chambers-media.com

by: David Jenyns

There are two cardinal successful stock market trading rules that I am sure you are quite familiar with by now.

The first of the two most common stock market trading rules are to cut your losses short. The second of the two most common successful stock market trading rules are to let your profits run. However, you can take it one-step further by fine-tuning your trailing stop losses, and becoming more risk seeking once your stock is in profit. Increasing your risks, at the right time, can allow you to get all the profit you possibly can out of your system. You may wish to test the effects of these successful stock market trading rules by having a wider trailing stop loss than your initial stop, and see how this is reflected in your system.

For example, you could set your initial stop loss at two ATR but set your trailing stop loss as three ATR. This allows the stock, once it`s in profit, a little bit more room to move. You`re still limiting your risk at the beginning of the trade by keeping a tight stop loss; however you`re going to become risk seeking in a profitable situation. That is to say you`ll be willing to risk more once you`re already in profit.

Personally, I think this is one of the many successful stock market trading rules you can use to take it a step further than most people are willing to go. With this strategy, I also mix and match my stop loss methods. For example, in one of my stock market trading rules, I set my initial stop loss at 2.5 ATR, but my trailing stop loss is calculated using a completely different method. I use what`s known as the lowest low stop. The way this stop loss works is you find the lowest low in the last X number of periods, and base your trailing stop loss on it.

Now, for that trend following system, I actually find the lowest low in the last 40 days. I then position my stop one cent below this low. It`s almost as though it`s consulting the price action itself by identifying where the lowest low is, and this can be highly effective. Many times my stop has been set one cent below a support line.

The way this trailing stop loss works is that on each day a new trading day is added to the chart, and one of the old days drop off. I then find the lowest low in the last 40 days, and reposition my stop at that point, if it needs to be repositioned. This stop has been extremely valuable for me, and it may be a stop loss that you may want to consider testing.

But, before you go looking for that perfect trailing stop loss, realize that in it`s own way, it`s very similar to the initial stop. There is no perfect stop that will guarantee to get you out of the stock at the perfect time, and save you the most profit.

Sometimes it will work for you. Other times it won`t. The real key and secret of having a stop loss and an initial stop do their best for you is not how you calculate it, it`s just having them in place.

You need to find an initial and a trailing stop loss that you`re comfortable with. You also need to understand how they work so that the actions they direct you to take makes sense to you. How do you find a stop that you`re comfortable with?

Test them. Pick out a whole lot of charts of stocks that you`ve been looking to trade, and marking where you would receive an entry signal, set various initial stops and trailing stop losses. Progress through the trade, revaluing your trailing stop loss and see which one works the best.

Often successful stock market trading rules are designed with simple concepts that works best at this point. When you base your system on understanding, rather than optimization, you are more likely to stick with it. If you can come up with a good, straightforward set of your own stock market trading rules, you will be able to apply it across a number of markets on most trading instruments. Really, when designing any system around a set of stock market trading rules, all components should apply to this same principle. You want to keep things as simple as possible, that way it`s robust and can be applied to any market. As long as you follow this underlying principle, you`ll be on the right track.

About The Author
David Jenyns is recognized as the leading expert when it comes to designing profitable trading systems. His most recent course Trading Secrets Revealed is a step- by-step trading roadmap to having excellent money management. Learn how *you* can become one of his students. Click Here ==> http://www.trading-secrets-revealed.com Receive David’s free trading tips by signing up for his eZine at: ==> http://www.trading-secrets-revealed.com/pop.html