Overleveraging

M Jagadish
What do you do if you saddled yourself with more shares/contracts that your money management formula allows and you are stuck at the wrong levels?

OK, here's what I really mean. Just for example, you are a day trader (this applies even to swing, position or other traders as well). Your money management formula says that at this particular time, you are allowed to go long 1000 shares of ACME. As usual, you saw a "golden" chance and banged out 1000 shares immediately. The stock moves up a wee bit. After a few minutes, the stock starts sliding down. Sounds familiar? OK, now even though your first doubts creep in, you look at your buying criteria (could be gap, indicators, price, tick, anything) and then you feel you are still right and you add another 1000. The stock slides another few ticks. Ouch! Now what?

Here's a simple analysis:
--> There is nothing called a "golden" chance really. Or, at least, a trader should not allow onself to believe there ever can be one
--> Don't violate Money Management
--> Never average! If you do want to average, average towards your direction, which means for buying, buy higher, not lower. This just means that the stock is moving in the general direction of your bet.

The first thing you need to do to correct is to immediately liquidate the extra shares that exceed your Money Management formula for the moment. So, in this case, sell the extra 1000. If by the time you do this, the stock is down to your first stop loss, follow your risk management criteria and remove whatever quantity should be removed at that point (say for example, 500). Keep the remaining 500 and again apply Risk management if the stock slides to your next stop loss level.
-->