Dancing close to the door. ( fast exits )
If you have been trading for a while you may have heard the term, “dance close to the door” this infers that you should be ready to exit a position at short notice.
This usually occurs for intraday traders as short term moves traded.
When setting up a trading position, considerable thought should be given to the size of the position taken.
There are some basic guidelines for doing this, one is to calculate the position size by taking into account the risk of the trade.
“Risk” refers to the distance from the entry point to the stoploss exit if the trade idea does not work. For example this risk component could be related to a percentage of the account size.
So if the distance to stop is 20c and you want to risk 1% of a $10,000 account, aka $100 then divide $100 by 20c to give a position size of 500 shares, easy!
Again, say the account size is $100,000 with 1% risk, aka $1000 divided by the stoploss of 20c gives a position size of 5000 shares.
Now this can present some issues if you need to exit quickly, the market depth shown below would allow the small position to exit into 2 levels of market depth where $16.80 and $16.79 would cover the order.
The trader with 5000 shares would be at risk of having to sell to several levels of the depth down to $16.75.
Using position size is important when opening a trade, and should be considered against the market depth itself, as a tip even in liquid stocks a position size should never exceed 3% of the average daily volume.