- Symbol - Ticker symbol of the stock or ETF
- Side - Indicates whether the trade is a long entry (buy) or short entry (sell short)
- Order - This is the order type for the trade. If new to trading, a basic explanation of order types can be found here.
- Share Size - The share size we are targeting for trade entry, listed as a percentage of your maximum risk per trade. Read on for further explanation...
How to quickly and easily determine your ideal share size
The first step is to establish your personal maximum capital risk per trade. This is the amount of real cash in your trading account you personally are comfortable losing if any individual trade hits its stop loss.
For experienced traders, a safe and typical risk level is 1% to 2% of account equity per trade. New traders should initially risk no more than 0.5% until they become more comfortable with the trading system.
For the examples below, let's assume you are trading with a $20,000 account, with a personal maximum risk per trade of 1% ($20,000 X 1% = $200).
Account size = $20,000
Maximum risk per trade = 1% of account equity
Maximum dollar risk per trade = $200
Again, your actual maximum percentage risk per trade will depend on your account and your personal risk parameters, which must be established before trading. In no case do we ever recommend a trader risks more than 3% of account equity per trade because just a string of losing trades could quickly cause you to dig a substantial hole that would take a while to recover from.
In the Wagner Daily watchlists, under the "Share Size" column, we display size as a percentage of a full position. A full position will be listed as 100%, and a half position 50%.
So, for example, if we list stock stock XYZ as a buy stop entry with the following trade details:
Share size = 75%
Entry = 30.12
Stop = 28.62
Actual share size = ?
First, we must establish the dollar risk of the trade. This trade calls for 75% of our maximum risk. We already know that our maximum risk per trade is $200 (1% of a $20,000 account), so we simply multiply our maximum risk per trade by 75% to arrive at $150 risk:
$200 x 75% = $150 (dollar risk of this trade)
The next step is to calculate the width of the stop by taking the entry price ($30.12) minus the stop price ($28.62):
30.12 - 28.62 = 1.50 points (stop width)
Once we have our maximum capital trade risk ($150) and stop width (1.5 points), we now divide trade risk ($150) by stop width (1.5) to arrive at our share size:
$150 / 1.50 = 100 shares (you can optionally round down if not a round lot share size)
As you can see, once you have established your maximum risk per trade (which should not change from trade to trade), there are only two simple steps to calculate your size.
Here is another example for you:
Your actual trading account size is $50,000 and your maximum risk per trade (established personally by you) is 2%:
Share size = 25%
Entry = 60.20
Stop = 58.95
Actual share size = ?
First, we must establish the dollar risk of the trade. This trade calls for 25% of our maximum risk. We already know that our maximum risk per trade is $1,000 ($50,000 x 2%), so we simply mutliply our maximum risk per trade by 25% to arrive at $250 risk:
$1,000 x 25% = $250 (dollar risk of this trade)
The next step is to calculate the stop width by taking the entry price (60.20) - stop price (58.95):
60.20 - 58.95 = 1.25 points (stop width)
Once we have our maximum trade risk ($250) and stop width (1.25 pts), we now divide trade risk ($250) by stop width (1.25) to arrive at our share size.
$250 / 1.25 = 200 shares entry
- Trigger - Exact price that the stock or ETF must trade through before we will enter the trade. For a "long" setup, the stock or ETF must trade at or above the trigger price (for "buy stop") or the maximum price we will pay for the trade (for "buy limit"). For a "short" setup, it must trade at or below the trigger price ("sell stop"). Note that we will only enter the position if the trigger price is hit during the trading day. Entering a trade before it trades through its pre-determined trigger price substantially increases the risk of loss, and is not recommended.
- 5-minute rule - Market makers can and do manipulate the opening price action of stocks and ETFs. To avoid "false triggers" for trade entry, we have a very simple rule in place in which we do not take any entries (long or short) that trigger within the first five minutes of trading. After 5-minutes have passed (9:35 am ET), we mark the 5-minute high (or low if short entry) and add (or subtract) 10 cents to that number as the new entry price.
Buy setup example:
The night before the market opens, we list stock ABC as a buy with a trigger price of $40.00. During the first 5 minutes of trading, ABC stock hits our buy trigger price at $40.00. Because our entry triggered before 9:35, we ignore the entry and apply the 5-minute rule. After 5-minutes have passed, we see that the 5-minute opening high was $40.20, so we add 10 cents to the 5-minute high, giving us a new buy trigger price point of $40.30.
The process is the same for a short selling setup, but we use the 5-minute low and subtract 10 cents from that number as the new short entry.
Short selling setup example:
The night before the market opens, we list stock XYZ as a short setup (betting the price will go down), with a short trigger price of $50.00. During the first 5-minutes of trading, XYZ stock trades below our short entry at price of $50.00. Because our entry triggered before 9:35, we ignore the entry and apply the 5-minute rule. After 5-minutes have passed, we see that the 5-minute low was $49.75, so we subtract 10 cents from the 5-minute low, giving us a new short entry point of $49.65.
If you are unable to watch the market during the open (such as if you have a daytime job), we highly recommend opening a trading account with a brokerage firm that allows the placement of "conditional orders." This means you can set your order to automatically not go live until 9:35 am, rather than immediately on the market open. Two brokers we recommend for this are Interactive Brokers and TradeStation, both of which offer very cheap commissions and high technology for active traders.
With regard to opening "gaps," if the 5-minute high of the gap is more than 1.3% above the trigger, then the setup is cancelled. See below for details.
- Gap Rule - When a stock or ETF "gaps" (opening price change from previous day's closing price) more than 1.3% above or below a trigger price for entry, the setup is automatically cancelled. For example, if we list a buy trigger at $30.00 and the price the following day opens greater than $30.39 ($30 x 1.3%), the trade is is automatically cancelled. So, if the stock/ETF opens at $30.45 the trade is automatically cancelled. One must place a buy stop-limit order to execute this rule. This is done by placing a buy stop order to trigger at $30.00, with a maximum fill (a limit) at $30.39. It is generally only necessary to do this when the futures market is indicating a sharp "gap" from the previous day's close.
- Stop - If the setup triggers for entry, this is the initial price at which we will have a protective stop market order (we always use "stop market," not "stop limit" orders). As a position becomes profitable, this stop price will often be trailed higher in order to lock in profits. Any new adjustments to the stop price are also reported in the next day's newsletter, under the "open positions" section. Note that trades are automatically closed if they hit their predetermined stop prices during the next trading session.
- Target - This is the roughly anticipated price we expect the stock or ETF will move to. Note that we automatically close trades as soon as they hit their target prices (unless the "stop" price is hit first). However, this does not mean we will always hold the stock or ETF to that price. When conditions warrant, we will take profits before the predetermined target price. Again, any overnight changes to the target price are reported under the "open positions" section.